THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


RE6.U.a.F*T.0FnCX 


Modern  Business 


A   SERIES    OF    TEXTS    PREPARED    AS 

PART   OF  THE   MODERN  BUSINESS 

COURSE  AND  SERVICE  OF  THE 

ALEXANDER  HAMILTON 

INSTITUTE 


ALEXANDER  HAMILTON  INSTITUTE 
NEW  YORK 


Modern  Business 

Editor-in-Chief 

JOSEPH  FRENCH  JOHNSON 

Dean,  New  York  University  School  of  Commerce,  Accounts  and  Finance 

Associate  Editors: 

PETER  P.  WAHLSTAD,  ROLAND  P.  FALKNER 


Titles  Authors 

Business  and  the  Man Joseph  French  Johnson 

Economics  OF  Business j  Joseph  French  Johnson 

i  Frank  L.  McVey 

Organization  and  Control Charles "W.Gerstenberg 

Factory  and  Office  Administration      .      .  Lee  Galloway 

Marketing  Methods       • Ralph  Starr  Butler 

Advertising  Principles Herbert  F.  De  Bower 

Salesmanship  and  Sales  Management     .      .  John  G.  Jones 

Credit  and  the  Credit  Man Peter  P.  Wahlstad 

Accounting  Principles Thomas  W.  Mitchell 

Cost  Finding Dexter  S.  Kimball 

Corporation  Finance William  H.  Walker 

Business  Correspondence Harrison  McJohnston 

Advertising  Campaigns Mac  Martin 

Inland  Traffic Simon  J.  McLean 

Foreign  Trade  and  Shipping Erich  W.  Zimmermann 

Banking  Principles  and  Practice      .      .      .  E.L.  Stewart  Patterson 

Domestic  AND  Foreign  Exchange        .      .      .  E.L.  Stewart  Patterson 

Insurance  and  Real  Estate \  S?Yf"^^'^"^'^^ 

I  Walter  Lmdner 

Merchandising John  B.  Swinney 

The  Exchanges  and  Speculation  ....  Albert  W.  Atwood 

Accounting  Practice  and  Auditing  .      .      .  John  T.  Madden 

Financial  and  Business  Statements  .      .      .  Leo  Greendlinger 

Investment Edward  D.  Jones 

Commercial  Law        ........  Walter  S.  Johnson 


BANKING  PRINCIPLES 
AND  PRACTICE 


BY 


E.   L.  STEWART  PATTERSON 

Superintendent  of  Eastern  Township  Branches, 
Canadian  Bank  of  Commerce 


MODERN  BUSINESS 

.      VOLUME    16 


ALEXANDER  HAMILTON  INSTITUTE 
NEW  YORK 


COPTRIGHT,  1911,  12,  13,  16,  17,  BY 

ALEXANDER  HAMILTON  INSTITUTE 

COPYRIGHT  IN  GREAT  BRITAIN,  1914,  17,  BY 

ALEXANDER  HAMILTON  INSTITUTE 

The  title  and  contents  of  thia  volume, 
as  well  aa  the  business  growing  out  of 
It.  are  further  protected  by  laws  re- 
lating to  trade  marks  and  unfair  trade. 

All  right  reserved,  including  tranBla- 
tion  into  Scandinavian. 

Regittered  trade  mark,  Reg.  V.  S.  Pat.  Off., 
Marca  Regisirada,  M.  de  P. 

Made  in  V.  S.  A. 


Hi, 

110% 

'    r 
PREFACE 

It  would  be  impossible  within  the  narrow  confines 
of  one  volume  to  deal  exhaustively  with  so  extensive 
a  subject  as  that  of  Canadian  banking  practice,  but 
it  is  hoped  that  the  parts  of  this  subject  dealt  with 
herein  will  be  found  to  be  treated  with  due  regard  to 
their  relative  importance,  and  that  no  really  essential 
information  has  been  overlooked.  As  far  as  possible, 
all  matters  coming  within  the  scope  of  the  Bills  of 
Exchange  Act  have  been  purposely  omitted,  because 
an  intimate  knowledge  of  the  act  itself  is  essential  to 
every  business  man  and  banker. 

Altho  Canadian  banks  may  differ  in  bookkeep- 
ing and  methods,  the  general  principles  and  aims  of 
their  systems  are  the  same,  and  the  reader  should  have 
no  difficulty  in  understanding  the  forms  and  methods 
explained  in  the  Text,  and  in  interpreting  them  by  his 
own  experience.  Too  specific  explanations  have  been 
avoided  as  far  as  possible,  lest  the  principles  involved 
should  be  buried  under  a  mass  of  detail. 

The  present  edition  of  the  Text  has  been  revised  and 
brought  down  to  the  end  of  1916;  the  bank  and  other 
financial  statements  presented  reflect  conditions  ex- 
isting prior  to  the  commencement  of  European  hos- 
tilities, inasmuch  as  these  statements  represent  the 
ordinary  position  of  the  banks.     More  recent  state- 


990817 


vi  PREFACE 

ments  reflect  the  abnormal  conditions  induced  by  the 
war,  and  are  therefore  but  of  temporary  interest. 

E.  L.  Stewart  Patterson. 
Sherbrooke,  Que. 


TABLE  OF  CONTENTS 

PART  I— BANKING  PRINCIPLES 
CHAPTER  I 

HISTORICAL  SKETCH 

SECTION  PAGE 

1.  Introduction ^.       .      .       .  3 

2.  New  France 4 

3.  British  Occupancy  (1763-1817) 5 

4.  Army  Bills 6 

5.  Provincial  Banking  (1817-1867) 6 

6.  National  Banking  System 8 

7.  First  Bank  Act  187i 9 

CHAPTER  II 

KINDS  OF  BANKS 

1.  Commercial  Banks 12 

2.  Savings  Banks 13 

3.  Trust  and  Loan  Companies 14 

CHAPTER  III 

THE  BANK  ACT 

1.  The  Bank  Act  of  1913 17 

2.  Changes  in  the  Bank  Act    .       .       .       .       ,       .       .  18 

3.  Shareholders'  Audit 18 

4.  Abstract  of  the  Bank  Act 20 

5.  Title  and  Interpretations  (Sections  1-2)   ...      21 

vii 


viii  BANKING  PRINCIPLES 

SECTION  PAGE 

6.  Application  of  the  Bank  Act  (Sections  3-7)   .       .  21 

7.  Incorporation  of  Banks  (Sections  8-12)    .       .       .22 

8.  Organization  of  Banks  (Sections  13-17)   ...  22 

9.  Refusal  of  Certificate 23 

10.  By-Laws  (Section  18) 24 

11.  Board  of  Directors  (Sections  19-28)   ....  24 

12.  General  Powers  of  Directors  (Sections  29-30)       .  25 

13.  Regulations  as  to  Shares  and  Shareholders  (Sec- 

tions 31-32) 25 

14.  Increase  or  Decrease  of  Capital  Stock  (Sections 

33-35) 25 

15.  Shares  and  Calls  (Sections  36-42)        ....  26 

16.  Transfer   and  Transmission   of   Shares    (Sections 

43-53) 26 

17.  Annual  and  Special  Statements  (Sections  54-55)  .  27 

18.  Shareholders'  Audit  (Section  56,  all  new)   ...  28 

19.  Special  Report  to  the  Minister  of  Finance  (Sec- 

tion 56a,  new) 29 

20.  Dividends  (Sections  57-59) 30 

21.  Cash  Reserve  (Section  60) 30 

22.  General  Note  Issue  and  Circulation  of  Notes  (Sec- 

tion 61) 30 

23.  Additional  Issue  for  Moving  Crops   (Section  61, 

Sub-sec.  15-20) 31 

24.  Central  Gold  Reserve  Issue  (Section  61,  Sub-sec. 

3-13) 31 

25.  Note  Issue  in  British  Colonies  (Section  62)      .       .  32 

26.  Pledge  of  Notes  Prohibited  (Section  63)    .       .       .  32 

27.  Bank    Circulation    Redemption    Fund     (Sections 

64-69) 32 

28.  Redemption  at  Par  (Sections  70-71)   ....  34 

29.  Payments  in  Dominion  Notes  (Section  72)       .      .34 

30.  Signing  of  Bills,  etc.  (Sections  73-74)       ...  35 

31.  Counterfeit  Notes  (Section  75) 35 


CONTENTS  ix 
CHAPTER  IV 

THE  BANK  ACT  (Continued) 

SECTION  PAGE 

1.  Business  and  Powers  of  a  Bank  (Sections  76-83)  36 

2.  Warehouse  Receipts  as  Collateral  Security   (Sec- 

tions 84-90) 37 

3.  Rates  of  Interest  and  Exchange  (Sections  91-94)  39 

4.  Deposits  (Sections  95-98)   ........  39 

5.  Purchase  of  the  Assets  of  a  Bank  (Sections  99- 

111) 40 

6.  Returns  to  Government  (Sections  112-114)     .       .  41 

7.  Payments  to  the  Minister  of  Finance  upon  Disso- 

lution of  a  Bank  (Sections  115-116)        .       .  44 

8.  Canadian  Bankers'  Association  (Sections  117—124  44 

9.  Insolvency  (Section  125) 45 

10.  Suspension  (Sections  126-131) 45 

11.  Penalties    (Sections   131a-158) 45 

12.  Amendments  to  Bank  Act  During  1913-1916      .  46 

13.  Bills  of  Exchange  Act 47 

CHAPTER  V 
NOTE  ISSUES  AND  THE  BRANCH  SYSTEM 

1.  Monetary  System 50 

2.  Dominion  Notes 52 

3.  Bank  Note  Issue 5'3 

4.  Security  to  Note  Holder 55 

5.  Elasticity 56 

6.  Seasonal  Fluctuations 57 

7.  Annual  Changes 58 

8.  Monthly  Changes 62 

9.  Emergency  Currency 64 

10.  Central  Gold  Reserves 65 

11.  Lost  and  Destroyed  Notes 67 

12.  Branch  System  \ 68 


X  BANKING  PRINCIPLES 

SECTION  PAGE 

13.  Branch  System  and  Circulation 70 

14.  Branch  S3'stem  and  the  Borrower 72 

15.  Estabhshing  a  Line  of  Credit 75 

16.  Branches  and  Panics 78 

17.  General  Review 81 

18.  Canadian  Banking  System  Under  War  Conditions  83 


CHAPTER  VI 
ANALYSIS  OF  A  BANK  STATEMENT 

1.  Bank  Statements       . 89 

2.  Deposits  Payable  After  Notice 92 

3.  Demand  Deposits 94 

4.  Deposits  Elsewhere 96 

5.  Due  Banks  in  Canada 96 

6.  Due  to  Banks  in  Foreign  Countries       ....  96 

7.  Dominion  and  Provincial  Governments        ...  96 

8.  Circulation 98 

9.  Capital  and  Reserve 99 

10.  Specie  and  Dominion  Notes 99 

11.  Notes  and  Checks  of  Other  Banks 100 

12.  Deposits  with  Other  Banks 101 

13.  Securities 101 

14.  Call  Loans  in  Canada 101 

15.  Call  Loans  Elsewhere 103 

16.  Reserves 108 

17.  Current  Loans 110 

18.  Overdue  Debts 113 

19.  Real  Estate 114 

20.  Bank  Premises 114 

21.  Profit  and  Loss  Statement  of  a  Bank  .       .       .       .114 

22.  Interest  on  Deposits 118 

23.  Profits  of  the  "Percentage  Bank" 120 

24.  Bank  Premises 121 


CONTENTS  xi 

SECTION  PAGE 

25.  Reserve  Fund 121 

26.  Gross  Profits 122 


PART  II— BANKING  PRACTICE 
CHAPTER  I 

HEAD  OFFICE 

1.  Directors 12T 

2.  General  Manager 129 

3.  Superintendent  of  Branches ISCT 

4.  Chief  Inspector 132 

5.  Secretary 133 

6.  Chief  Accountant 133 

CHAPTER  II 

HEAD  OFFICE  RECORDS 

1.  Head*  Office  Bookkeeping 135 

2.  The  General  Ledger 135 

3.  Correspondents'  Ledgers 136 

4.  Statistical  Books 13T 

5.  Branch  Clearings 137 

6.  Stock  Books,  etc 138 

7.  Circulation  Records 139 

8.  Returns  to  Head  Office 141 

9.  Branch  Clearings  Statement  (Daily)    ...       .       .  141 

10.  Financial  Statement 141 

11.  Discount  Report 142 

12.  Cash  Item  Account 142 

13.  Balance  Sheet 142 

14.  Overdue  Bills 143 

15.  Monthly  Liability  Return 143 

16.  Sundry  Returns 143 


xii  BANKING  PRINCIPLES 

SECTION  PAGE 

17.  Weekly  Report  on  Business 143 

18.  Records  of  Routine  Work 14f5 

CHAPTER  III 

THE  BRANCH  STAFF 

1.  Manager 147 

2.  Daily   Work 148 

3.  Accountant           149 

4.  Teller 150 

5.  Ledger-Keeper 151 

«.     Collection   Clerk 152 

7.  Discount  Clerk 153 

8.  The  Junior 153 

CHAPTER  IV 

BRANCH  BOOKS  AND  RECORDS 

1.  Bank  Accounting 155 

2.  Books  of  a  Branch 156 

3.  Loose-Leaf  Accounting 159 

4.  Cash  Book 160 

5.  Writing  Up  the  Cash  Book       .      .      .      .     •/.      .162 

6.  Supplementary  Cash  Book 162 

7.  Discount  Register 164 

8.  Discount  Blotter 166 

9.  Discount  Diar}' 167 

10.  Trade  Bills  Remitted  Diary 169 

11.  Drafts  Register 169 

12.  Check  Lists 171 

13.  Cash  Items 173 

14.  Remittance  Book 175 

15.  Branch  Clearing  Statement        ......  177 

16.  "At   Credit"  Advices 179 

17.  Head  Office  Entries 181 


CONTENTS  xiii 

SECTION  PAGE 

18.  Business  with  Other  Banks  .      .      .      .      ,      .      .  183 

19.  Teller's  Records 183 

20.  General  Ledger    . 184 

21.  Current  Deposit  Ledger 187 

22.  Savings  Bank  Ledger     .      .  ^ 189 

23.  Liability  Ledger 190 

24.  Collection  Register 192 

25.  Collateral  Register 194 

26.  General  Statement  Books 194 

27.  Balance  Book 196 

28.  Overdraft  Register 196 

29.  Discrepancies  Book 196 


CHAPTER  V 

DEPOSIT  BUSINESS 

1.  New  Accounts 198 

2.  Opening  Accounts <      .  198 

3.  Particulars  to  Be  Recorded  in  Ledger  ....  199 

4.  Partnership  Accounts 200 

5.  Conversion  of  Partnership  into  Joint  Stock  Com- 

pany         201 

6.  Joint  Accounts 201 

7.  Accounts  with  Married  Women 201 

8.  Waiver  and  Authority  to  Charge  Back      .      .      .  203 

9.  The  Ledger 205 

10.  Deposit  Slips 206 

11.  Money  Received  After  Hours 207 

12.  Customers'  Pass-Books 207 

13.  Customers'  Certification  of  Accounts    ....  208 

14.  Guarding  Against  Fraud 209 

15.  Certification  of  Checks 210 

16.  Cashing  Checks 211 

17.  Savings  Bank  Department 213 


xiv  BANKING  PRINCIPLES 

SECTION  PAGE 

18.  Duplicate  Pass-Books 214 

19.  Machine  Statements 21-1 


CHAPTER  VI 

LOANING  A  BANK'S  MONEY 

1.  Experience  the  Only  Teacher 218 

2.  Causes  of  Failure  in  Business 220 

3.  Statement  of  Affairs 223 

4.  Science  of  Credit 227 

5.  Form  of  Statement 228 

6.  Cash 229 

7.  Merchandise 234 

8.  Bills  and  Accounts  Receivable 236 

9.  IMachinery  and  Fixtures 236 

10.  Current  Liabilities 238 

11.  Mortgages  and  Other  Factors 239 

12.  Sundry  Information ' .  240 

13.  Preparing  the  Application 242 

14.  The  Apphcation 243 

15.  Guarantees 246 

16.  Customers'  Wills 247 

17.  Power  of  Attorney 249 

CHAPTER  VII 

CLASSIFICATION  OF  LOANS 

1.  Call  Loans 254 

2.  Loans  to  Joint  Stock  Companies 256 

3.  Loans  to  IMunicipalities 260 

4.  Loans  to  Professional  Men 262 

5.  Loans  to  Farmers 263 

6.  Loans  to  Retail  Merchants 265 

7.  Loans  to  Manufacturers  and  Merchants    .       .       .  266 


CONTENTS  XV 

SECTION  PAGE 

8.  Collateral  Notes 268 

9.  Accommodation  Paper 272 

10.     Overdrafts 274 

CHAPTER  VIII 

ADVANCES  ON  WAREHOUSE  RECEIPTS  AND  ASSIGNMENTS 

1.  Sections  86  and  88 276 

2.  Section  88 278 

3.  Promise          279 

4.  Assignment 281 

5.  Declaration          286 

6.  The  Note 289 

7.  Making  Advances 292 

8.  Warehouse  Receipts        . 295 

9.  Substitution         297 

10.  "Current   Season" 301 

11.  Default 302 

12.  General  Remarks 303 

CHAPTER  IX 

INTERNAL  INSPECTION 

1.  Branch  Inspection 306 

2.  The  Audit 307 

3.  Cash  and  Securities 308 

4.  Ledgers,  etc 309 

5.  Sundries  > 310 

6.  Inspection  Liability  Return 311 

CHAPTER  X 

BANK  COST  ACCOUNTING 

1.     Need  of  a  Cost  System 315 


o 


Principles  of  Cost  Accounting 317 


xvi  BANKING  PRINCIPLES 

SECTION  PAGE 

3.  Small  Checking  Accounts 319 

4.  Branch  Expenses 323 

5.  Inland  Exchange 325 

6.  Cost  Data 331 

7.  An  Account  Analyzed 333 

8.  Method  of  Analysis 335 

9.  Exchange  Received  on  Items  Deposited  and  Col- 

lected       337 

10.  Checks  Paid  at  Par  at  Other  Branches      .       ,       .    339 

11.  General  Remarks .   339 


PART  I 
BANKING  PRINCIPLES 


XVI— 2 


BANKING   PRINCIPLES 


CHAPTER  I 

HISTORICAL  SKETCH 

1.  Introduction. — In  an  intelligent  study  of  the 
Canadian  banking  system  particular  stress  should  be 
laid  on  the  fact  that  the  system  has  been  evolved,  not 
made ;  that  it  has  grown  up  with  the  country,  suffered 
with  it,  prospered  with  it  and,  since  the  Confedera- 
tion, been  the  backbone  of  commerce  and  agriculture. 
The  careful  decennial  revisions  of  the  banking  laws 
have  kept  the  system  continually  in  touch  with  the  re- 
quirements of  Canada's  constantly  altering  conditions. 
In  fact,  in  no  other  country  does  the  history  of  bank- 
ing support  so  forcibly  the  contention  of  Horace 
White  in  his  "INIoney  and  Banking" : 

The  principles  of  banking  are  the  outgrowth  of  experi- 
ment. They  must  be  learned  from  the  history  of  banking 
and  particularly  from  the  laws  that  have  been  enacted  from 
time  to  time.  These  laws  are  the  crystalHzation  of  ideas 
dominant  at  given  periods. 

The  history  of  banking  in  Canada  may  be  roughly 
divided  into  four  periods : 


4t  BANKING  PRINCIPLES 

New  France 1608-1763 

British  Occupancy    1763-1817 

Provincial  Banking 1817-1867 

National  Banking  System 1867- 

2.  New  France. — During  this  period  (1608-1763> 
Canada  had  its  first,  and  it  is  to  be  hoped  its  last,  ex- 
perience in  "fiat"  money.  In  lieu  of  a  better  circu- 
lating medium,  beaver  and  other  furs,  wheat  and 
tobacco  were  accepted  in  trade,  and  tho  at  first  the 
issue  of  government  obligations  in  the  shape  of  "or- 
donnances"  and  card  money  were  a  welcome  relief, 
the  scandalous  abuse  of  this  privilege  quickly  brought 
it  into  disrepute,  for  no  matter  in  what  form,  or  under 
what  conditions  these  obligations  were  issued,  they 
all  traveled  the  same  road  to  ultimate  depreciation. 

The  country  found  itself  at  the  time  of  the  capitu-  • 
lation,  in  1760,  loaded  with  a  tremendous  debt  of  over 
80,000,000  livres  outstanding,  of  which  some  34,- 
000,000  livres  were  in  ordonnances,  7,000,000  in  card 
money  and  treasury  bonds  and  the  balance  in  other 
forms  of  obligation.  This  formed  one  of  the  most 
difficult  problems  that  confronted  the  British  govern- 
ment and,  notwithstanding  the  impoverished  condi- 
tion of  France,  the  British  insisted  upon  a  definite 
basis  of  settlement.  Accordingly,  a  convention  was 
signed  in  1766  under  which  bills  of  exchange  and 
kindred  obligations  were  to  be  redeemed  by  the 
French  government  at  50  per  cent  of  their  face  value, 
and  ordonnances  and  other  forms  of  debt  at  25  per 


HISTORICAL  SKETCH  5 

cent.  Owing  to  circumstances  which  need  not  be 
entered  into  here,  the  unfortunate  holders  eventually 
received  only  a  moiety  of  this  settlement. 

The  history  of  this  period  presents  an  instructive 
lesson  on  the  evils  of  money  issued  on  credit  only,  even 
tho  the  credit  is  that  of  a  government.  There  is 
no  doubt  that  Alexander  Hamilton  had  the  sad  ex- 
perience of  New  France  before  him  when  he  made  his 
severe  stricture  on  government  issues  based  on  credit. 
In  his  report  on  banking  in  1790,  he  said: 

The  emitting  of  paper  money  by  the  authority  of  the 
government  is  wisely  prohibited  to  the  individual  states  by 
the  national  constitution,  and  the  spirit  of  this  prohibition 
ought  not  to  be  disregarded  by  the  government  of  the  United 
States.  Tho  paper  emissions  under  a  general  authority 
might  have  some  advantages  not  applicable  and  be  free  from 
some  disadvantages  which  are  applicable  to  the  like  emissions 
by  the  states  separately,  yet  they  are  of  a  nature  so  liable  to 
abuse,  and  it  may  even  be  affirmed  so  certain  of  being  abused, 
that  the  wisdom  of  the  government  will  be  shown  in  never 
trusting  itself  with  the  use  of  so  seducing  and  dangerous  an 
expedient. 

3.  British  occupancy  (1763-1817).— The  British 
government  found  the  countiy  practically  without 
any  currency,  and  immediately  took  steps  to  place 
the  finances  of  the  colony  on  a  stable  foundation  by 
establishing  an  equitable  and  permanent  standard  of 
value  for  the  various  coins  which  now  became  current 
in  Canada.  The  government  imported  and  paid  out 
large  quantities  of  Spanish  milled  dollars  at  4s.  6d. 
per  dollar  or  $4.44%  per  pound  sterhng,  the  old  par 


6  BANKING  PRINCIPLES 

of  exchange.     These  were  used  for  the  payment  of 
the  army  and  the  pm-chase  of  pubHc  supphes. 

In  1791  representative  government  was  estabhshed 
and  during  the  next  few  years  several  unsuccessful 
attempts  were  made  to  obtain  charters  for  banks  of 
issue. 

4.  Army  hills. — In  1812,  during  the  war  with  the 
United  States,  the  British  government,  finding  itself 
hampered  by  a  serious  lack  of  currency,  met  the  dif- 
ficulty by  the  passage  of  the  Army  Bill  Act.  Under 
this  act  the  Army  Bill  office  was  established  and  em- 
powered to  issue  bills  of  various  denominations. 
These  bills  were  readily  absorbed  by  the  people,  who 
were  quick  to  realize  the  advantage  of  a  system  of 
financing  so  carefully  thought  out  with  a  view  to 
prompt  and  satisfactory  redemption,  and  with  that 
quality  of  elasticity  which  later  became  such  a  prom- 
inent feature  in  the  bank  note  circulation  of  Canada. 

5.  Provincial  hanking  (1817-1867). — The  contrac- 
tion of  the  Army  Bills  circulation  naturally  caused 
great  inconveniences  to  the  public ;  the  principal  busi- 
ness centers,  Montreal  and  Quebec,  being  the  greatest 
suiferers.  The  bills  filled  a  long-felt  want  and  in 
^lay,  1817,  to  supply  their  place,  the  ^lontreal  Bank, 
now  known  as  the  Bank  of  Montreal,  was  founded, 
followed  by  the  establislmient  of  other  banks  under 
charter  from  the  various  provinces.  Between  1817 
and  1825  two  banks  were  established  in  Lower  Can- 
ada (Quebec),  and  one  each  in  Upper  Canada  (On- 
tario),  New  Brunswick   and  Nova   Scotia.     There 


HISTORICAL  SKETCH  7 

was  no  attempt  at  uniformity  in  the  conditions  of  the 
various  charters,  but  Httle  attention  having  been  paid 
in  those  days  to  the  theory  of  banking.  As  a  rule, 
the  charters  were  based  upon  the  articles  of  agree- 
ment as  drawn  up  by  the  incorporators  and,  as  might 
be  expected  under  such  circumstances,  many  of  the 
clauses  were  dictated  by  selfishness  or  originated  in  a 
total  misconception  of  the  functions  of  a  bank. 

This  unsatisfactory  situation  was  further  compli- 
cated by  independent  ventures  into  the  field  of  bank- 
ing legislation  by  the  Parliament  itself,  such  as  the 
"Free  Banking  Act"  and  the  "Provincial  Note  Act." 
Fortunately,  the  British  government  was  fully  awake 
to  the  dangers  of  promiscuous  banking,  and  even  at 
the  risk  of  having  interference  in  these  matters  mis- 
construed, persisted  in  demanding  that  all  legisla- 
tion bearing  on  note  issues,  banking  and  the  like, 
should  receive  the  royal  assent  before  going  into  effect. 
The  young  colony  at  first  resented  this  restriction, 
but  soon  learned  to  appreciate  the  guidance  of  riper 
and  more  experienced  judgment,  and  undoubtedly 
this  wise  action  on  the  part  of  the  Colonial  Office 
saved  Canada  from  being  the  exploiting  ground  of 
many  unsound  and  dangerous  banking  theories.  As 
it  was,  many  vicissitudes  were  experienced,  and  in 
1837,  during  the  rebellion,  a  temporary  suspension  of 
specie  payments  occurred  under  permission  of  an 
order  in  council.  The  necessity  for  this,  however,  can 
hardly  be  considered  a  reflection  on  the  banks,  as 
it  was  due  principally  to  similar  tho  more  serious 


8  BANKING  PRINCIPLES 

conditions  which  obtained  at  that  time  in  the  United 
States,  Canada  then  as  now  being  intimately  con- 
cerned in  the  financial  welfare  of  its  neighbor  to  the 
South. 

Considering  the  physical  and  other  disabilities 
under  which  these  early  banks  labored,  their  record  is 
surprisingly  creditable,  and  much  of  their  experience 
and  foresightedness  is  embodied  in  the  present  Bank 
Act.  In  fact,  from  1829  to  1866,  not  one  bank  failed. 
True,  trying  times  and  heavy  losses  were  met  time 
and  again,  but  with  the  exception  of  the  authorized 
suspension  in  1837,  which  was  very  reluctantly  taken 
advantage  of,  the  banks  not  only  remained  solvent, 
but  maintained  the  redemption  of  their  obligations  in 
specie. 

6.  National  hanking  system. — In  July,  1867,  the 
British  North  America  Act  was  passed  by  the  Im- 
perial Parliament,  under  which  the  provinces  of  Can- 
ada were  confederated  into  the  Dominion  of  Canada. 
The  framers  of  the  Act,  with  creditable  foresight,  real- 
ized that  the  banks,  like  the  railroads,  in  order  to  dis- 
charge most  effectively  their  natural  functions,  must 
be  national  rather  than  provincial  in  character,  and 
to  this  end  vested  in  the  parliament  of  the  new  Do- 
minion the  exclusive  authority  to  legislate  on  all 
matters  pertaining  to  banks  and  banking,  currency 
and  coinage,  negotiable  instruments  and  kindred 
matters.  With  the  passing  of  the  Act  the  existing 
banks  came  automatically  under  the  new  jurisdiction. 
Tentative  legislation  between  1867  and  1870  extended 


HISTORICAL  SKETCH  9 

the  powers  of  the  banks  previously  incorporated  bj'^ 
the  provinces  to  the  whole  Dominion  and  unified  the 
laws  as  far  as  practicable. 

7.  First  bank  act  1871. — The  first  general  bank  act 
of  the  Dominion  was  passed  in  1871.  By  this  act  the 
duration  of  a  bank's  charter  was  practically  limited  to 
ten  years,  and  as  the  charters  of  the  banks  expired  they 
were  renewed  until  the  following  revision  of  the  act. 
The  renewals  of  the  charters  were  thus  made  concur- 
rent with  decennial  revisions  of  the  act  in  1880,  1890, 
1900,  and  so  on.  Various  amendments  were  made 
during  the  first  few  years,  but  since  then,  except  at 
the  regular  revisions,  changes  have  been  infrequent, 
and  have  been  made  only  to  meet  some  contingency 
due  to  the  rapid  expansion  of  Canada,  or  to  correct 
some  omission  or  ambiguity  overlooked  in  the  previous 
revision. 

The  last  revision  should  have  been  made  in  1910, 
but  owing  to  causes  which  it  is  not  necessary  to  detail 
here,  the  charters  of  the  banks  were  extended  to  1913. 
The  delay,  however,  was  accompanied  by  little  or  no 
inconvenience  to  those  concerned;  the  charters  of  the 
various  banks  were  extended  until  the  new  act  was 
finally  passed.  Changes  that  were  imminently  neces- 
sary were  looked  after  by  special  amendments  to  the 
act  of  1900. 

In  many  ways  the  delay  was  not  without  its  advan- 
tages. The  tremendous  expansion  in  the  financial 
and  commercial  life  of  Canada  demanded  that  the  re- 
vision should  be  most  carefully  and  presciently  con- 


10  BANKING  PRINCIPLES 

sidered.  During  1913,  the  banking  system  of  Can- 
ada was  freely  discussed,  both  in  the  pubhc  press  and 
in  special  committees  appointed  for  the  purpose. 

It  is  notable  that  the  revisions  are  made  neither  by 
theorists  nor  tainted  with  political  expediency.  The 
ablest  men  in  the  country,  regardless  of  their  politics, 
are  consulted  and  give  evidence  before  the  parlia- 
mentary committee.  Lawyers,  merchants,  farmers, 
bankers  and  others  equally  well  qualified  contribute 
their  criticism  and  advice  towards  the  advancement  of 
the  best  interests  of  the  country.  The  measures  are 
then  fully  debated,  and  when  finally  passed,  are  ac- 
ceptable to  all  interested. 

This  brief  account  of  banking  in  Canada  is  given, 
not  as  a  history,  which  would  be  without  the  scope  of 
this  volume,  but  in  order  to  assist  the  reader  in  realiz- 
ing that  the  growth  of  the  banking  system  of  Canada 
has  been  one  of  evolution  rather  than  of  expediency  or 
hasty  legislation,  and  that  the  machinery  provided  for 
the  systematic  and  regular  revision  of  the  Bank  Act 
is  invaluable  in  meeting  the  tremendous  expansion  and 
constantly  changing  requirements  of  Canadian  com- 
merce and  agriculture.  This  chapter,  read  in  con- 
junction with  the  chapter  on  the  Bank  Act,  and  the 
explanation  of  the  branch  system  and  note  circulation, 
should  demonstrate  clearly  how  far  the  functions  per- 
formed by  the  banks  in  Canada  respond  to  the  require- 
ments of  a  new  country,  as  defined  so  lucidly  by  Sir 
Edmund  Walker: 


HISTORICAL  SKETCH  11 

What  is  necessary  in  a  banking  system  in  order  that  it 
may  answer  the  requirements  of  a  rapidly  growing  country 
and  yet  be  safe  and  profitable? 

1.  It  should  afford  the  greatest  possible  measure  of  safety 
to  the  depositor. 

2.  It  should  supply  the  legitimate  wants  of  the  borrower, 
not  merely  under  ordinary  circumstances,  but  in  times  of 
financial  stress,  at  least  without  that  curtailment  which  leads 
to  abnormal  rates  of  interest  and  to  failures. 

3.  It  should  possess  the  machinery  necessary  to  distribute 
money  over  the  whole  area  of  the  country,  so  that  the  small- 
est possible  inequalities  in  the  rate  of  interest  will  result. 

4.  It  should  create  a  currency  free  from  doubt  as  to  value, 
readily  convertible  in  specie,  and  answering  in  volume  to  the 
requirements  of  trade. 

There  should  be  as  complete  a  relation  as  possible  between 
the  currency  requirements  of  trade  and  the  cause  which 
issues  paper  money,  and,  as  it  is  quite  as  necessary  that  no 
over-issue  should  be  possible,  and  that  the  supply  of  currency 
should  be  adequate,  there  should  be  a  similar  relation  be- 
tween the  requirements  of  trade  and  the  cause  which  forces 
notes  back  for  redemption. 

REVIEW 

Upon  what  fact  should  we  lay  particular  stress  in  studying 
Canada's  banking  history? 

What  were  the  first  steps  taken  by  the  British  Government  to 
place  the  finances  of  the  colony  on  a  stable  foundation? 

What  is  the  duration  of  a  bank's  charter?  Why  is  this  desir- 
able? 

According  to  Sir  Edmund  Walker  what  should  a  banking  sys- 
tem do  to  meet  the  requirements  of  a  rapidly  growing  country  ? 


CHAPTER  II 

KINDS  OF  BANKS 

1.  Commercial  banks. — In  the  Bank  Act  of  Can- 
ada, no  attempt  is  made  to  define  the  functions  of  a 
bank  in  general  terms;  the  Act  merely  states  that  "a 
bank  means  any  bank  to  which  this  act  applies."  A 
bank  in  Canada  therefore  means  one  of  the  chartered 
banks,  as  the  law  prohibits  the  use  of  the  word  "bank" 
by  any  other  institution. 

Economists  have  defined  the  functions  of  a  bank  in 
many  different  ways,  but  all  arrive  at  the  same  gen- 
eral conclusions. 

Horace  White,  in  his  "Money  and  Banking,"  thus 
defines  a  bank : 

An  institution  where  deposits  of  money  are  received  and 
paid,  where  credit  is  manufactured  and  extended  to  bor- 
rowers, and  where  the  exchange  of  property  is  facihtated. 
Having"  first  acquired  the  confidence  of  the  community,  the 
bank  extends  its  credit  by  purchasing  interest-bearing  se- 
curities, mainly  business  men's  notes,  pa^-able  at  a  fixed  time 
and  giving  the  sellers  the  right  to  draw  checks  upon  itself 
payable  at  sight.  The  amounts  thus  authorized  to  be  drawn 
are  termed  deposits,  the  bank  being  liable  for  them  in  the 
same  way  as  for  actual  mone}-  deposited.  .  .  •  Bank  notes 
are  the  bank's  promises  to  pay  money  to  the  bearer  on  de- 
mand. 

12 


KINDS  OF  BANKS  13 

All  these  functions  are  discharged  by  the  Canadian 
banks,  but  their  economic  value  is  greatly  enhanced 
by  the  system  of  branches,  which  enables  the  banks  to 
gather  and  distribute  money  over  the  whole  area  of 
the  country,  thus  utilizing,  as  far  as  possible,  the  sup- 
ply of  loanable  capital  to  meet  the  demand.  In  other 
words,  thru  the  branch  system,  money  is  constantly 
working  to  find  its  own  level.  The  Canadian  banks 
are,  therefore,  essentially  of  a  national  rather  than  of 
a  local  character. 

2.  Savings  banks. — The  main  function  of  a  savings 
bank  is  to  encourage  thrift  in  a  community  by  accept- 
ing, for  deposit,  money  in  small  amounts  and  allowing 
interest  thereon.  Upon  deposits  of  this  class,  no 
matter  how  small  the  amount,  the  chartered  banks  of 
Canada  pay  interest  and  they  operate  as  part  of  each 
branch  what  is  called  a  Savings  Bank  Department. 
Consequently  the  need  of  special  institutions  for  this 
purpose  has  hardly  been  felt  in  Canada. 

Outside  the  government  savings  bank  there  are 
practically  only  two  savings  banks  in  the  country, 
namely:  the  City  and  District  Savings  Bank,  Mon- 
treal, and  La  Caisse  d'Economie,  Quebec.  These  are 
well-known  institutions  and  are  highly  successful  in 
encouraging  thrift  especially  among  the  Canadians 
of  French  origin. 

The  Dominion  government  supports  two  savings 
banks,  one  the  Postal  Savings  Bank,  which  is  op- 
erated by  the  Post  Office  Department  and  accepts  de- 
posits at  every  post  office,  and  the  other  called  the 


14  BANKING  PRINCIPLES 

Government  Savings  Bank,  which  is  under  the  control 
of  the  Finance  Department.  The  latter  receives  de- 
posits at  comparatively  few  points,  principally  in  the 
larger  towns  in  the  maritime  provinces,  and  its  busi- 
ness is  gradually  being  merged  with  that  of  the  Postal 
Savings  Bank.  The  money  received  from  these  sav- 
ings banks  is  regarded  by  the  government  as  a  loan, 
which  practically  replaces  money  that  could  be  bor- 
rowed outside  of  Canada.  The  rate  of  interest  in 
both  banks  is  3  per  cent.  Each  entry  costs  about  12 
cents  or  .62  per  cent  of  the  average  deposit,  making 
a  total  of  3.62  per  cent.^  It  is  easily  seen  that  if  an 
adequate  reserve  were  maintained  it  would  bring  the 
cost  of  these  deposits  to  over  4I/2  per  cent.  The  gov- 
ernment, however,  avoids  the  expense  and  responsi- 
bility of  maintaining  an  adequate  reserve  by  a  clause 
in  the  Bank  Act  which  makes  it  compulsory  for  the 
banks  to  honor  government  checks  without  charge 
wherever  presented,  and  all  withdrawals  from  the  sav- 
ings banks  are  in  this  form. 

Theoretically  these  savings  banks  are  intended  for 
the  benefit  of  the  poorer  and  more  ignorant  classes  of 
the  community.  It  is  not  intended  that  the  well-to- 
do  should  avail  themselves  of  the  privileges  they  offer, 
and  to  this  end  there  is  a  limit  placed  on  the  amount 
which  may  be  deposited. 

3.  Trust  and  loan  companies. — Of  late  years  a  con- 
siderable number  of  these  companies  have  been  organ- 

1  Hearing  before  House  Committee  on  Post  OfBce  Savings  Bank  1909, 
page  70. 


KINDS  OF  BANKS  15 

ized  in  Canada  under  provincial  or  Dominion  char- 
ters, and  as  it  is  an  open  question  whether  their  con- 
trol is  vested  in  the  Federal  or  in  the  provincial  au- 
thorities, some  companies,  to  make  sure  of  their 
position,  have  obtained  charters  from  both  sources. 

Trust  and  loan  companies  are  supposed  to  enter 
into  the  field  of  banking  only  in  so  far  as  it  is  neces- 
sary to  transact  their  especial  business.  There  is  a 
tendency,  however,  recently  develoj^ed,  to  enter  into 
competition  with  the  banks  in  various  ways,  espe- 
cially in  canvassing  for  demand  deposits.  This  is  a 
dangerous  practice  for  trust  companies  to  indulge  in, 
for  demand  deposits  require  special  provision  in  the 
shape  of  cash  reserve,  and  a  study  of  the  annual  state- 
ment of  the  average  trust  or  loan  company  will  show 
how  little  this  responsibility  is  realized  or  provided 
for.  Like  the  government,  each  company  evidently 
thinks  it  can  rely  on  the  banks  in  case  of  trouble,  over- 
looking entirely  the  fact  that  at  such  times  the  banks 
themselves  are  making  every  effort  to  protect  their 
own  reserves,  and  would  hardly  be  willing  to  advance 
money  to  a  corporation  which  has  all  its  assets  locked 
up  in  real  estate  and  other  fixed  securities. 

One  of  the  basic  principles  of  credit  is  that  the  cur- 
rency of  the  assets  should  not  exceed  the  currency  of 
the  liabilities,  and  any  departure  from  this  principle 
is  bound  to  prove  disastrous  eventually.  The  assets 
of  trust  and  loan  companies  in  Canada  are  invariably 
based  entirely  on  real  estate  and  other  non-liquid  se- 
curities, and  their  deposits,  if  any,  should  be  composed 


16  BANKING  PRINCIPLES 

of  the  long  time  funds  of  the  communitj^ — those  which 
are  not  regularly  employed  in  the  quick  turnover  of 
commercial  life.  To  accept  demand  deposits,  and 
then  loan  on  real  estate  the  funds  thus  obtained,  is  to 
invite  disaster.  The  question  is  a  serious  one  for  the 
country,  and  likely  to  prove  more  serious  later  on, 
unless  steps  are  taken  to  bring  all  these  companies 
under  government  control  with  uniform  charters.  To 
be  consistent,  the  same  sound  considerations  which 
led  the  framers  of  the  Bank  Act  to  prohibit  banks 
from  loaning  on  real  estate  should  work  inversely, 
and  should  withhold  from  companies  loaning  on  real 
estate  the  right  to  receive  demand  deposits.  As  am- 
ple funds  are  obtainable  both  in  Canada  and  Europe 
from  the  sale  of  debentures  and  bonds  secured  by  real 
estate,  a  company  well  managed  and  reputable  has 
no  need  to  plunge  into  the  dangerous  ebb  and  flow 
of  transient  money. 

REVIEW 

Frame  a  brief  yet  complete  definition  of  a  bank. 

What  feature  of  the  Canadian  banking  system  enables  the  banks 
to  perform  their  functions  so  efficiently  ? 

What  provisions  are  there  for  savings  deposits  in  Canada? 

What  valuable  service  do  trust  and  loan  companies  perform  for 
the  country? 


CHAPTER  III 

THE  BANK  ACT 

1.  The  Bank  Act  of  1913.— Th^  present  Bank 
Act/  which  came  into  force  on  July  1,  1913,  consists 
of  one  hundred  and  sixty  sections  or  clauses.  Its 
leading  features  may  be  briefly  summarized  as  fol- 
lows : 

1.  Interpretation  and  application Sections        1-7 

2.  Incorporation  of  new  banks "  8-17 

3.  Purchase  of  the  assets  of  a  bank "  99-111 

4.  Insolvency  and  winding  up,  etc "  115-131 

5.  OfFences  and  penalties "        131a-160 

6.  Internal  regulations  as   regards  direc- 

tors,   shares,    annual    statements, 

audits,  etc "  18-60 

7.  Returns  to  government "  112—114 

8.  Note   issues "  61-75 

9.  Business  and  powers  of  a  bank "  76-98 

It  will  be  noted  that  the  first  five  divisions  deal  with 
special  conditions,  such  as  the  establishment  of  new 
banks,  amalgamations,  etc.,  and  are  only  of  occasional 
application.  The  last  four,  however,  deal  with  mat- 
ters of  everyday  banking  and  call  for  careful  study. 
The  last  division,  "Business  and  powers  of  a  bank," 

1  Copies  of  the  Bank  Act  or  Bills  of  Exchange  Act  may  be  obtained 
by  remitting  twenty  cents  for  each  copy  to  the  King's  Printer,  Ottawa. 
XVI— 3  17 


18  BANKING  PRINCIPLES 

wherein  are  defined  the  business  relations  of  banks 
with  the  public,  is  therefore  of  particular  interest  to 
branch  officers.  The  otlier  three  headings  deal  with 
matters  more  or  less  pertaining  to,  or  under  the  direct 
control  of  the  head  office. 

2.  Changes  in  the  Bank  Act, — Two  very  important 
additions  were  made  in  the  present  act,  namely:  the 
sections  providing  for  a  shareholders'  audit,  and  the 
creation  of  central  gold  reserves  in  connection  with 
the  issue  of  extra  circulation  when  required.  Au- 
thority was  given  to  loan  money  to  farmers  on  the 
security  of  threshed  grain,  and  a  number  of  minor 
changes  were  made,  mostly  of  a  routine  or  explana- 
tory character,  such  as  the  opening  up  of  registiy 
offices  in  the  different  provinces,  the  printing  of  Sec- 
tion 125  on  stock  books,  documents  and  the  like, 
and  the  establishment  of  several  new  headings  in  the 
monthly  and  annual  statements.  The  central  gold 
reserves  will  be  dealt  with  in  the  chapter  on  note 
issues. 

3.  Shareholders'  audit. — A  provision  for  the  exter- 
nal supervision  of  banks  is  an  entirety  new  feature  of 
the  Bank  Act.  No  objection  was  advanced  by  any 
one  as  to  the  desirability  or  usefulness  of  the  external 
audit  itself,  but  the  problem  was  how  to  effect  an 
audit  without  evoking  the  aid  of  too  cumbersome  or 
too  burdensome  a  mechanism  and  how  to  avoid  plac- 
ing too  great  a  burden  of  responsibility  on  those  as- 
suming the  work,  without  first  ascertaining  how  far 
the  plwsical  limitations  of  any  such  examination,  due 


THE  BANK  ACT  19 

to  the  branch  system,  would  affect  the  value  of  its  con- 
clusions. Three  forms  of  external  supervision  were 
given  consideration,  namely:  examination  by  the  Do- 
minion government,  by  the  Canadian  Bankers'  As- 
sociation, and  by  competent  accountants. 

The  idea  of  government  supervision  was  advocated 
by  those  who  were  admirers  of  the  system  of  national 
bank  examinations  obtaining  in  the  United  States. 
It  is  obvious,  however,  that  even  if  these  examinations 
were  effective  in  the  United  States  (which  is  very 
much  open  to  question),  the  plan  itself  would  not  be 
feasible  in  Canada  on  account  of  the  branch  system. 
Furthermore,  there  is  no  doubt  that  the  govenmient 
inspection  of  a  bank  is  taken  by  the  public,  in  a  way, 
as  a  guarantee  of  solvency.  In  the  United  States 
such  a  belief  is  of  only  local  effect  whereas  in  Canada 
it  would  be  national  in  its  influence,  would  practically 
put  all  banks  on  the  same  footing  in  the  public  eye, 
and  would  work  a  palpable  injustice  to  those  banks 
which  have,  by  years  of  sound  banking,  established 
themselves  firmly  in  the  confidence  of  the  public. 

With  such  supervision,  therefore,  would  go  a  great 
deal  of  responsibility  for  a  bank  failure,  and  this  re- 
sponsibility the  government  was  naturally  reluctant 
to  assume.  Another  objection  to  government  super- 
vision would  be  the  fact  that  the  appointments  of 
examiners  would  run  the  risk  of  being  occasionally 
based  on  political  expediency  rather  than  on  expert 
knowledge  and  fitness  for  the  positions.  The  Cana- 
dian government  was  well  advised  in  not  allowing  it- 


20  BANKING  PRINCIPLES 

self  to  be  burdened  with  a  new  and  unknown  respon- 
sibility. 

The  Canadian  Bankers'  Association  was  also  averse 
to  assuming  the  responsibility  of  inspection,  as  such 
action  would  be  considered  tantamount  to  a  guarantee 
by  the  associated  banks  of  the  solvency  of  the  indi- 
vidual banks.  Furthermore,  no  matter  how  impar- 
tially such  a  supervision  was  exercised  by  the  Asso- 
ciation, it  would  always  be  open  to  misconstruction, 
and  any  bank  whose  affairs  called  for  criticism,  would 
not  be  likely  to  neglect  an  opportunity  of  appealing 
to  the  public  sympathy  with  a  cry  of  persecution. 

The  system  finall}^  adopted  promises  to  overcome 
the  above  objections  and  to  be  a  satisfactory  solution 
of  the  question.  The  act  provides  for  the  appoint- 
ment of  auditors  by  the  shareholders  of  each  bank 
from  a  panel  of  forty  or  more,  selected  by  the  general 
managers  of  all  the  banks,  and  approved  by  the  JNIin- 
ister  of  Finance.  These  auditors  check  the  cash  and 
verify  the  securities  of  the  head  office  and  such 
branches  as  they  may  deem  necessary  to  visit,  and 
report  to  the  shareholders  annually  upon  the  affairs 
of  the  bank. 

4.  Abstract  of  the  Bank  Act. — A  knowledge  of  the 
Bank  Act  is  most  necessary  in  the  study  of  both  the 
theory  and  the  practice  of  Canadian  banking,  and  in  a 
volume  of  this  nature  a  brief  synopsis  of  the  act  will 
be  found  useful.  The  full  text  of  the  act  should  be 
consulted,  of  course,  when  the  exact  wording  is  de- 
sired. 


THE  BANK  ACT  21 

5.  Title  and  interpretations  (Sections  1-2). — The 
Act  may  be  cited  as  the  bank  act.  The  intention  of 
the  Act  in  its  use  of  certain  words  and  expressions  is 
clearly  defined. 

6.  Application  of  the  Bank  Act  (Sections  3-7). — 
The  provisions  of  the  Act  apply  to  the  following 
banks : 

Chief  Office 
Name  of  Bank  of  Bank 

The  Bank  of  Montreal    Montreal 

The  Bank  of  Nova  Scotia     Halifax 

The  Bank  of  Toronto Toronto 

The  Molsons  Bank Montreal 

La  Banque  Nationale Quebec 

The  Merchants  Bank  of  Canada Montreal 

La  Banque  Provinciale  du  Canada Montreal 

The  Union  Bank  of  Canada Winnipeg 

The  Canadian  Bank  of  Commerce Toronto 

The  Royal  Bank  of  Canada ]\Iontreal 

The  Dominion  Bank Toronto 

The  Bank  of  Hamilton Hamilton 

The  Standard  Bank  of  Canada Toronto 

La  Banque  d'Hochelaga Montreal 

The  Bank  of  Ottawa Ottawa 

The  Imperial  Bank  of  Canada Toronto 

The  Home  Bank  of  Canada Toronto 

The  Northern  Crown  Bank Winnipeg 

The  Sterling  Bank  of  Canada Toronto 

The  Weyburn  Security  Bank Weyburn 

The  Bank  of  British  North  America London,   Eng. 

The  Act  extends  these  charters  from  July  1,  1913, 
to  July  1,  1923,  and  makes  special  provision  for  the 
Bank  of  British  North  America,  which  still  operates 
under  its  original  royal  charter. 


52  BANKING  PRINCIPLES 

7.  Incorporation  of  banks  (Sections  8-12). — The 
conditions  under  which  a  new  bank  may  be  organized 
and  the  procedure  necessary  are  clearly  set  forth. 
The  first  step  is  to  obtain  an  Act  of  Incorporation  b}'' 
means  of  an  application  signed  by  at  least  five  re- 
sponsible men,  known  as  provisional  directors,  who  are 
able  to  satisfy  the  Parliamentary  Committee  on 
Banking  and  Commerce  that  their  project  is  a  gen- 
uine one,  that  they  are  fully  aware  of  the  responsi- 
bility of  their  undertaking,  and  that  they  have  the 
ability  and  backing  necessary  to  carry  out  the  organi- 
zation of  a  bank  successfully.  If  the  committee  re- 
ports favorably,  letters  of  incorporation  are  granted, 
and,  after  ten  days'  public  notice,  the  provisional  di- 
rectors may  advertise  for  public  subscriptions  and 
cause  stock  books  to  be  opened.  No  bank,  however, 
can  be  incorporated  with  a  capital  of  less  than  $500,- 
000,  divided  into  shares  of  the  par  value  of  $100 
each. 

8.  Organization  of  hanks  (Sections  13-17). — If 
within  a  year  the  sum  of  not  less  than  $500,000  of  the 
capital  stock  of  the  bank  has  been  bona  fide  sub- 
scribed, and  not  less  than  $250,000  paid  in  and  de- 
posited with  the  INIinister  of  Finance,  the  provisional 
directors  may,  by  public  notice  published  for  at  least 
four  weeks,  call  a  meeting  of  the  subscribers  for  the 
purpose  of  organizing  the  bank.  At  this  meeting  the 
subscribers  shall  elect  five  or  more  qualified  directors 
to  replace  the  provisional  directors,  determine  the 
date  of  the  annual  meeting,  etc.     A  certificate  of  the 


THE  BANK  ACT  23 

Treasury  Board  ^  permitting  the  bank  to  commence 
business  may  now  be  applied  for,  but,  before  issuing 
such  a  certificate,  the  Treasuiy  Board  must  be  sat- 
isfied : 

1.  That  the  payments  and  subscriptions  ai-e  all 
genuine  and  in  form ; 

2.  That  the  deposit  of  $250,000  with  the  Minister 
of  Finance  has  been  made  and  is  still  in  his  hands ; 

3.  That  the  directors  are  qualified  and  have  been 
regularly  elected ; 

4.  That  the  expenses  of  incorporation  and  organi- 
zation are  reasonable; 

5.  That  all  other  requirements  have  beeij  complied 
with. 

If  everything  is  found  satisfactory  a  certificate  will 
then  be  granted  and  the  deposit  of  $250,000  returned, 
less  a  reduction  of  $5,000  as  the  initial  payment  on 
account  of  the  Bank  Circulation  Redemption  Fund 
(see  Section  64).  Then,  and  not  until  then,  is  the 
new  bank  able  to  issue  notes,  open  branches  and  begin 
the  general  business  of  banking. 

9.  Refusal  of  certificate. — If,  however,  the  certifi- 
cate of  the  Treasury  Board  is  not  obtained  within  one 
year  from  the  date  of  the  passing  of  the  Act  of  In- 

1  The  Treasury  Board  exercises  important  functions  under  the  act,  and 
is  frequently  referred  to.  The  INIinister  of  Finance  and  Receiver-General 
is  the  chairman  of -the  board,  which  consists  of  four  other  ministers  be- 
longing to  the  King's  Privy  Council  for  Canada,  nominated  from  time  to 
time  by  the  Governor-in-Council.  The  Treasury  Board  acts  as  a  com- 
mittee of  the  Privy  Council  on  all  matters  referring  to  finance  and  pub- 
lic accounts,  and  has  power  to  call  for  any  information  it  may  require 
from  corporations  and  persons,  etc.,  who  are  bound  by  law  to  furnish 
the  same  to  the  government. 


M  BANKING  PRINCIPLES 

corporation,  all  the  rights  and  privileges  granted 
thereunder  cease,  and  provision  is  made  for  the  equi- 
table liquidation  of  any  bank  so  unsuccessful.  The 
severe  penalties  attached  to  any  infraction  of  the  reg- 
ulations covering  the  incorporation  and  organization 
of  banks  are  set  out  in  Sections  131  and  132. 

10.  By-latcs  (Section  18). — The  shareholders  may 
pass  by-laws  regarding  the  following  matters:  the 
date  of  the  annual  general  meeting  at  which  share- 
holders elect  directors;  regulations  (subject  to  limi- 
tations mentioned  in  Act)  as  to  proxies;  the  number, 
quorimi,  qualifications,  remuneration,  etc.,  of  direc- 
tors ;  limits  of  loans  or  discounts  to  directors  or  to  any 
one  person,  firm  or  corporation;  authority  to  con- 
tribute to  guarantee  and  pension  funds,  etc.  A  copy 
of  all  the  by-laws  of  a  bank  must  be  sent  to  each 
shareholder  at  the  end  of  each  fifth  year,  beginning 
December  31,  1913. 

11.  Board  of  directors  (Sections  19-28). — The 
stock,  property,  affairs  and  concerns  of  the  bank  are 
managed  by  a  board  of  directors  who  are  to  be  elected 
annually  and  shall  be  eligible  for  re-election,  subject, 
however,  to  the  following  provisions : 

Each  director  shall  hold  stock  of  the  bank  as  absolute  and 
sole  owner  in  his  individual  right,  on  which  not  less  than 
from  $3,000  to  $5,000  has  been  paid  up,  the  amount  vary- 
ing according  to  the  paid-up  capital  of  the  bank.  This 
amount,  however,  may  be  increased  by  by-law. 

The  majority  of  the  directors  must  be  British  sub- 
jects living  in  Canada. 


THE  BANK  ACT  25 

The  method  by  which  directors  shall  be  elected  is 
provided  for,  also  the  manner  in  which  directors  shall 
elect  the  president,  vice-president  and  fill  vacancies 
on  the  board. 

12.  General  powers  of  directors  (Sections  29-30). 
— The  directors  may  make  by-laws  for  the  regulation 
of  all  matters  in  connection  with  the  business  of  the 
bank,  the  duties  and  conduct  of  the  employees,  and 
the  establishment  of  guarantee  and  pension  funds  for 
the  staff. 

The  directors  are  required  to  obtain  satisfactory 
security  from  all  officers  and  clerks  for  the  faithful 
performance  of  their  duties. 

13.  Regulations  as  to  shares  and  shareholders  ( Sec- 
tions 31-32). — A  special  general  meeting  may  be 
called  at  any  time  for  any  purpose  by  four  or  more 
of  the  directors,  or  by  at  least  twenty-five  of  the 
shareholders  who  own  not  less  than  one-tenth  of  the 
paid-up  capital  stock  of  the  bank. 

Votes  of  the  shareholders  at  any  meeting  must  be 
by  ballot,  and  each  shareholder  has  one  vote  for  each 
share  owned.  Shareholders  may  vote  by  proxy,  but 
no  shareholder  who  is  also  an  employee  of  the  bank 
is  allowed  to  vote. 

14.  Increase  or  decrease  of  capital  stock  (Sections 
33-35 ) . — The  capital  stock  of  the  bank  may  be  in- 
creased at  any  time  by  a  by-law  passed  at  a  general 
meeting  of  the  shareholders,  subject,  however,  to  the 
approval  of  the  Treasury  Board. 

New  shares  issued  must  be  allotted  to  the  share- 


26  BANKING  PRINCIPLES 

holders  pro  rata,  on  such  terms  as  are  fixed  by  the 
directors,  with  certain  limitations  as  to  the  price,  the 
amount  and  the  frequency  of  the  calls  for  payment 
thereof. 

Provision  is  made  for  the  reduction  of  the  capital 
stock  of  the  bank  if  such  action  should  become  neces- 
sary. 

15.  Shares  and  calls  (Sections  36-42). — Shares  of 
the  capital  stock  of  a  bank  shall  be  personal  property. 
The  manner  of  subscribing  for  shares  and  making 
calls  thereon  is  provided  for.  Calls  shall  be  made  at 
the  option  of  the  directors,  but  such  calls  shall  be 
payable  at  intervals  of  not  less  than  thirt^^  days,  and 
in  amounts  not  exceeding  10  per  cent  of  each  share 
subscribed. 

There  must  be  printed  on  each  page  of  the  stock 
book  upon  which  subscriptions  for  new  stock  are  re- 
corded, and  "on  every  document  constituting  or  au- 
thorizing such  subscriptions,  on  a  part  of  the  page 
and  document,  respectively,  which  may  be  readily 
seen  by  the  person  recording  the  subscription,  or  by 
the  person  signing  the  document,  a  copy  of  Section 
125,"  which  provides  for  the  double  liability  of  the 
shareholders. 

16.  Transfer  and  transmission  of  shares  (Sections 
43-53). — No  transfer  is  valid  unless  the  stock  has 
been  accepted  in  writing  by  the  person  to  whom  the 
transfer  is  made,  and  the  person  transferring  the 
stock  has  satisfied  the  bank  as  to  any  liability  that  may 
be  due  to  it.  • 


THE  BANK  ACT  27 

The  bank  may  open  and  maintain  in  any  province 
in  Canada  in  which  it  has  one  or  more  branches  a 
share  registry  office,  at  which  the  shares  of  the  share- 
holders resident  in  that  province  shall  be  registered. 
A  list  of  all  transfers  of  shares  registered  each  day 
at  the  respective  places  where  transfers  are  authorized 
shall  be  made  up  each  day,  and  kept  for  the  inspection 
of  the  shareholders. 

The  procedure  in  connection  with  the  sale  and 
transmission  of  shares  under  special  conditions,  such 
as  writ  of  execution,  marriage  of  female  shareholders, 
lunacy,  bankruptcy,  death  and  the  like,  is  set  forth. 

A  bank  is  not  bound  to  see  to  the  execution  of  any 
trust,  whether  expressed,  implied  or  constructive, 
to  which  any  share  of  its  stock  is  subject.  A  person 
holding  stock  as  executor,  trustee,  guardian,  etc.,  is 
not  personally  liable  unless  the  trust  is  not  dis- 
closed. 

17.  Annual  and  special  statements  (Sections  54- 
55 ) } — At  every  annual  general  meeting  the  outgoing 
directors  must  submit  a  full  statement  of  the  affairs 
of  the  bank. 

A  statement  of  the  profit-and-loss  account  for  the 
financial  year  next  preceding  the  date  of  the  annual 
general  meeting  must  accompany  the  statement. 
These  statements  must  be  signed  by  the  general  man- 
ager or  other  officers  of  the  bank  next  in  authority, 
and  on  behalf  of  the  board  by  the  president  or  vice- 
president  or  any  other  two  directors.     Copies  of  these 

1  See  Figure  2  for  prescribed  form  for  monthly  statements. 


28  BANKING  PRINCIPLES 

statements  must  be  sent  to  each  shareholder  of  the 
bank  and  to  the  Finance  Minister. 

The  directors  must  also  submit  to  the  shareholders 
such  further  statements  of  the  affairs  of  the  bank  as 
the  shareholders  may  require  by  by-law  regularly 
passed. 

18.  ShareJwlders*  audit  (Section  56,  all  new). — 
Shareholders  of  a  bank  shall,  at  each  annual  general 
meeting,  appoint  and  fix  the  remuneration  of  an  audi- 
tor or  auditors,  chosen  from  a  panel  of  not  less  than 
forty  selected  by  the  general  managers  of  the  banks 
and  approved  by  the  iSIinister  of  Finance.  Full 
provision  is  made  for  filling  the  vacancy  caused  by  the 
death  of  an  auditor  or  the  failure  of  the  shareholders 
to  appoint  an  auditor.  Written  notice  of  the  inten- 
tion to  nominate  any  auditor  other  than  a  retiring 
auditor  must  be  given  at  least  twenty-one  days  before 
the  annual  meeting;  the  bank  must  cause  a  copy  of 
such  notice  to  be  delivered  to  the  retiring  auditor,  and 
particulars  of  the  nomination  must  be  forwarded  to 
each  shareholder  at  least  fourteen  days  before  the 
meeting. 

Every  auditor  of  a  bank  shall  have  right  of  access  to 
the  books,  cash,  securities  and  records  of  the  bank, 
and  is  entitled  to  require  from  the  directors  and  offi- 
cers such  information  and  explanation  as  may  be  nec- 
essary for  the  performance  of  his  duties. 

An  auditor  is  not  required  to  visit  any  branch  for 
the  purpose  of  examining  the  books,  cash,  securities 
and  records,  but  he  may  do  so  if  he  considers  it  ad- 


THE  BANK  ACT  29 

visable.  It  is  sufficient  for  the  purposes  of  the  audit 
if  he  has  access  to  the  returns,  statements,  and  the  like, 
which  are  sent  to  the  head  office  in  the  ordinary  way. 
He  must,  at  least  once  during  the  year,  check  the  cash, 
securities,  etc.,  at  the  chief  office  of  the  bank  and  at 
those  branches  at  which  he  may  consider  it  advisable. 
The  auditors  shall  make  a  report  to  the  share- 
holders : 

(a)  On  the  accounts  examined  by  them; 

(b)  On  the  checking  of  the  cash  and  securities; 

(c)  On  the  statement  of  the  affairs  of  the  bank 
submitted  at  the  meeting; 

The  report  must  also  state: 

(a)  Whether  or  not  they  have  obtained  all  the  in- 
formation and  explanation  they  have  required; 

(b)  Whether,  in  their  opinion,  the  transactions  of 
the  bank  which  have  come  under  their  notice  have 
been  within  the  powers  of  the  bank; 

(c)  Whether  the  cash  and  securities  agreed  with  the 
books  of  the  bank ;  and 

(d)  Whether,  in  their  opinion,  the  statement  re- 
ferred to  in  the  report  is  properly  drawn  up  so  as  to 
exhibit  a  true  and  correct  view  of  the  state  of  the 
bank's  affairs,  according  to  the  best  of  their  informa- 
tion and  the  explanations  given  to  them,  and  as  sho\vn 
by  the  books  of  the  bank. 

This  report  must  accompany  the  statement  sub- 
mitted to  the  shareholders  at  the  annual  general  meet- 
ing. 

19.  Special  report  to  the  Minister  of  Finance  (Sec- 


30  BANKING  PRINCIPLES 

tion  5Qa,  new) . — The  Minister  may  require  any  duly 
appointed  auditor,  or  any  auditor  whom  he  may  se- 
lect, to  examine  and  inquire  specially  into  the  affairs 
and  business  of  a  bank,  and  the  auditor  so  selected 
shall,  at  the  conclusion  of  his  examination,  report 
fully  to  the  Minister  the  results  thereof. 

20.  Dividends  (Sections  57-59). — These  sections 
deal  with  dividends  and  the  method  of  their  payment. 
The  directors  are  permitted  to  declare  quarterly  or 
half-yearly  dividends,  but  no  dividend  or  bonus  shall 
be  declared  which  will  impair  the  paid-up  capital  of 
the  bank,  or  which  exceeds  a  rate  of  eight  per  cent, 
unless,  after  paying  the  same  and  providing  for  all 
bad  and  doubtful  debts,  the  bank  has  a  rest  or  re- 
serve fund  equal  to  at  least  30  per  cent  of  its  paid-up 
capital. 

Previous  to  the  payment  of  any  dividend  or  bonus 
the  directors  must  give  public  notice  for  at  least  four 
weeks  prior  to  the  date  fixed  for  payment. 

21.  Cash  reserve  (Section  60). — The  bank  must 
hold  in  Dominion  of  Canada  notes  not  less  than  40 
per  cent  of  the  cash  reserves  which  it  has  in  Canada. 
Arrangements  for  issuing  Dominion  notes  in  ex- 
change for  gold,  and  for  redeeming  them,  are  made  at 
the  branch  offices  of  the  Department  of  Finance, 
namely:  Toronto,  JMontreal,  Halifax,  St.  John, 
Winnipeg,  Victoria,  Charlottetown,  Regina  and 
Calgary. 

22.  General  note  issue  and  circulation  of  notes 
( Section  61 ) . — A  bank  may  issue  and  reissue  its  notes 


THE  BANK  ACT  31 

payable  to  bearer  on  demand  and  intended  for  circu- 
lation to  the  amount  of  its  unimpaired  paid-up  capital. 
No  such  note,  however,  shall  be  for  a  sum  less  than  five 
dollars  or  for  any  sum  which  is  not  a  multiple  of  five 
dollars. 

23.  Additional  issue  for  moving  crops  (Section  61, 
sub-sec.  15-20). — During  the  usual  season  of  moving 
crops — that  is  to  say,  from  and  including  the  first  day 
of  September  in  any  year  to  the  last  day  of  February 
next  ensuing — a  bank  is  allowed  to  issue  additional 
notes  to  an  amount  not  exceeding  15  per  cent  of  its 
combined  unimpaired  paid-up  capital  and  rest  or  re- 
serve fimd,  as  stated  in  the  monthly  return  to  the  gov- 
ernment for  the  month  immediately  preceding  that 
in  which  the  additional  amount  is  issued.  While  such 
excess  notes  are  in  circulation  the  banks  must  pay  to 
the  Minister  of  Finance  interest  on  the  excess  at  a  rate 
not  exceeding  5  per  cent  per  annum,  the  interest  to  be 
calculated  on  the  amount  of  notes  in  circulation  for 
each  day  during  the  month,  as  shown  in  a  return  to  be 
sent  monthly  to  the  Minister.  This  feature  was 
added  to  the  Bank  Act  in  1908  in  the  form  of  an 
amendment  to  the  Act  of  1901. 

24.  Central  gold  reserve  issue  (  Section  61,  sub-sec. 
3-13) . — In  addition  to  this  special  provision  for  emer- 
gency circulation  during  the  crop -moving  period,  the 
new  act  provides  for  an  increase  of  circulation  at  any 
time  against  the  deposit  of  current  gold  or  Dominion 
notes,  in  what  is  termed  the  central  gold  reserves. 
These  central  gold  reserves  are  under  the  control 


32  BANKING  PRINCIPLES 

of  four  trustees,  three  appointed  by  the  Canadian 
Bankers'  Association,  and  one  by  the  Minister  of 
Finance.  It  is  the  duty  of  the  trustees  to  receive 
gold  coin  and  Dominion  notes  that  any  bank  may  de- 
sire to  deposit  with  them,  and  the  bank  may  then 
issue  extra  circulation  up  to,  but  not  exceeding,  the 
amount  of  such  deposit.  When  any  part  of  the 
amount  deposited  in  the  central  gold  reserves  is  not 
required  for  the  purpose  of  issuing  notes,  the  surplus 
may  be  returned  to  the  bank  by  the  trustees  upon 
formal  application.  The  central  gold  reserves  are 
subject  to  frequent  inspection  and  audit  by  the  De- 
partment of  Finance. 

25.  Note  issue  in  British  colonies  (Section  62). — 
Provision  is  made  for  issuing  notes  in  pounds  sterling 
or  in  dollars  at  agencies  of  a  bank  in  any  British  col- 
ony or  possession  other  than  Canada.  The  denomi- 
nations of  such  notes  are  limited  to  one  pound  sterling 
or  any  multiples  of  that  sum,  or  five  dollars  or  multi- 
ples thereof,  and  the  amount  issued  in  this  way  must 
be  treated  as  a  part  of  the  general  circulation  of 
the  bank. 

26.  Pledge  of  notes  prohibited  (Section  63). — A 
bank  shall  not  pledge,  assign  or  hypothecate  its  own 
notes,  and  no  loan  thereon  shall  be  recoverable  from 
the  bank  or  its  assets. 

27.  Bank  Circidation  Bedemption  Fund  (Sections 
64-69) . — Each  bank  must  maintain  with  the  Minister 
of  Finance  a  deposit  equal  to  at  least  five  per  cent  of 
the  average  amount  of  its  notes  in  circulation  during 


THE  BANK  ACT  33 

the  year.  These  deposits  are  known  as  the  Bank 
Circulation  Redemption  Fund,  and  are  held  only  for 
the  purpose  of  redeeming  the  notes  of  any  banks  which 
fail  to  redeem  their  own  issues  in  specie  or  Dominion 
notes.  For  all  notes  so  redeemed  the  fund  has  the 
same  rights  against  the  estate  of  the  failed  bank  as 
any  other  holder.  Interest  at  three  per  cent  is  al- 
lowed by  the  Government  on  the  fund.  The  amount 
at  credit  of  the  banks  in  this  fund  is  to  be  adjusted 
on  the  first  of  July  of  each  year,  in  such  a  way  as  to 
make  the  amount  at  credit  of  each  bank  equal  to  five 
per  cent  of  its  average  note  circulation  during  the  pre- 
ceding twelve  months.  In  calculating  the  average 
circulation  the  average  amount  at  the  credit  of  the 
bank  in  the  central  gold  reserves  is  to  be  deducted. 

If  a  bank  suspends  payment  of  its  notes,  interest  ac- 
crues thereon  at  five  per  cent  per  annum^  until  the 
day  named  for  their  redemption,  of  which  public  no- 
tice is  given  by  the  liquidator,  after  which  interest  on 
the  notes  outstanding  ceases.  If,  after  the  expiration 
of  two  months  from  the  date  of  suspension,  the 
liquidator  has  not  funds  to  redeem  the  notes,  the  Min- 
ister of  Finance  may  redeem  them  out  of  the  Circula- 
tion Fund.  If  payment  made  from  the  fund  exceeds 
the  contributions  of  the  failed  bank,  the  other  banks 
must  recoup  the  fund  pro  rata  for  the  amount  of  the 
excess,  recoveries  from  the  liquidation  of  the  failed 

1  The  provisions  contained  in  Sections  64-69  were  added  to  the  Bank 
Act  of  1890,  at  the  suggestion  of  the  banks  themselves.     The  rate  was 
changed  from  six  per  cent  to  five  per  cent  in  the  revision  of  1900. 
XVI— 4 


34  BANKING  PRINCIPLES 

bank  being,  of  coui'se,  distributed  in  like  proportion. 
For  this  purpose,  however,  no  bank  shall  be  required 
to  pay  in  any  one  year  more  than  one  per  cent  of  the 
average  amount  of  its  notes  in  circulation. 

In  the  winding-up  of  a  bank,  if  satisfactory  ar- 
rangements are  made  for  the  redemption  of  the  out- 
standing notes,  with  interest,  the  Treasury  Board  may 
return  the  amount  to  the  credit  of  the  bank  or  such 
part  as  may  seem  expedient. 

The  Treasury  Board  will  make  all  necessary  rules 
and  regulations  as  to  the  management  of  the  Cumula- 
tion Fund. 

The  Minister  of  Finance  may  take  legal  action,  if 
necessary,  to  enforce  payment  of  any  sum  due  by  a 
bank  to  the  fund. 

28.  Redemption  at  par  (Sections  70-71). — Banks 
are  obliged  to  make  arrangements  to  ensure  the  circu- 
lation at  par  of  their  notes  in  any  and  every  part  of 
Canada,  and  must  maintain  offices  or  redemption 
agencies  for  the  payment  of  notes  at  Toronto,  Mon- 
treal, Halifax,  St.  John,  Winnipeg,  Victoria,  Char- 
lottetown,  Regina  and  Calgary,  and  at  such  other 
places  as  are  from  time  to  time  designated  by  the 
Treasury  Bioard.  Altho  the  notes  of  a  bank  are  al- 
most invariably  payable  only  at  its  head  office,  they 
must  be  accepted  at  par  at  any  of  the  branches,  agen- 
cies or  offices  of  the  bank. 

29.  Payments  in  Dominion  notes  (Section  72). — 
In  making  a  payment  a  bank  must,  if  required,  pay  in 
Dominion  notes   (legal  tender)   in  denominations  of 


THE  BANK  ACT  35 

$1,  $2  and  $5,  not,  however,  exceeding  $100  in  any 
one  payment.  No  payment  in  Dominion  notes  or 
notes  of  the  bank  shall  be  made  in  unclean  or  torn 
bills,  and  the  Treasury  Board  has  the  right  to  make 
regulations  regarding  the  disinfection  and  sterilization 
of  bank  and  Dominion  notes  by  the  banks. 

30.  Signing  of  hills,  etc.  (Sections  73-74). — Bills 
or  notes  issued  by  a  bank  are  binding  on  a  bank,  tho 
not  sealed  with  the  corporate  seal  of  the  bank.  The 
directors  may  deputize  an  officer  of  the  bank  to  sign 
notes  intended  for  circulation. 

If  both  the  signatures  on  a  bank  note  are  impressed 
by  machinery,  at  least  one  name,  together  with  a  dis- 
tinguishing device  and  number,  must  be  impressed  or 
engraved,  under  authority  of  the  bank,  after  the  notes 
have  been  received  from  the  engraver  or  printer. 

31.  Counterfeit  notes  (Section  75). — Officers  re- 
ceiving public  moneys  and  bank  officers  must  stamp  or 
write  on  fraudulent  bank  notes  or  Dominion  notes 
such  words  as  "Counterfeit,"  "Altered,"  or  "Worth- 
less," as  the  case  may  be.  If,  however,  a  bill  is 
wrongly  stamped  it  must  be  redeemed  at  its  face  value 
by  the  officer  at  fault. 

REVIEW 

What  are  the  leading  features  of  the  Bank  Act  of  1913? 
Give  the  argument  for  and  against  an  audit  of  the  banks  by 
the  Dominion  Government. 

State  the  procedure  in  incorporating  a  new  bank. 
What  information  should  be  contained  in  the  auditor's  report? 
What  provision  is  made  for  note  issue  in  British  colonies  ? 
Are  banks  obliged  to  keep  their  notes  circulating  at  par? 


CHAPTER  IV 

THE  BANK  ACT  (Continued) 

1.  Business  and  j)owers  of  a  bank  (Sections  76- 
83). — The  first  section,  76,  is  of  sufficient  importance 
to  give  in  full.     It  states  that  a  bank  may : 

(a)  Open  branches,  agencies  and  offices; 

(b)  Engage  in  and  carry  on  business  as  a  dealer  in  gold 
and  silver  coin  and  bullion ; 

(c)  Deal  in,  discount  and  lend  money  and  make  advances 
upon  the  security  of,  and  take  as  collateral  security  for  any 
loan  made  by  it,  bills  of  exchange,  promissory  notes  and 
other  negotiable  securities,  or  the  stock,  bonds,  debentures 
and  obligations  of  municipal  and  other  corporations, 
whether  secured  by  mortgage  or  otherwise,  of  Dominion, 
Provincial,  British,  foreign,  and  other  public  securities ;  and 

(d)  Engage  in,  and  carry  on,  such  business  generally  as 
appertains  to  the  business  of  banking. 

Except  as  authorized  by  this  act,  the  bank  shall  not, 
either  directly  or  indirectly: 

(a)  Deal  in  the  buying  or  selling  or  bartering  of  goods, 
wares  and  merchandise,  or  engage  or  be  engaged  in  any  trade 
or  business  whatsoever ; 

(b)  Purchase,  or  deal  in,  or  lend  money,  or  make  advances 
upon  the  security  or  pledge  of  any  share  of  its  own  capital 
stock,  or  of  the  capital  stock  of  any  bank ;  or 

(c)  Lend  money  or  make  advances  upon  the  security,  mort- 
gage or  hypothecation  of  any  lands,  tenements  or  immovable 
property,  or  of  any  ships  or  other  vessels,  or  upon  the  se- 
curity of  any  goods,  wares  and  merchandise. 

36 


THE  BANK  ACT  37 

The  bank  shall  have  a  privileged  lien  on  shares  of 
its  own  stock  or  on  dividends  for  any  debt  or  liability 
of  a  shareholder.  In  case  of  default,  provision  is 
made  for  the  sale  and  transfer  of  such  shares  within 
twelve  months  after  the  maturity  of  the  debt  and  after 
due  notice  to  the  debt'or. 

Provision  is  made  for  the  sale  of  collateral  security 
held  by  the  bank  in  case  of  default  in  the  payment  of 
the  relative  debt. 

A  bank  may  hold  real  property  for  its  own  use  and 
occupation,  and  may  sell  the  same  and  acquire  other 
property  in  its  stead  for  the  same  purpose. 

A  bank  may  take  a  mortgage  on  real  estate  or  per- 
sonal property  by  way  of  additional  security  for  a 
debt  already  contracted. 

A  bank  may  acquire  title  to  real  property  on  which 
it  has  a  lien  as  security  by  purchasing  the  equity  of  re- 
demption or  by  foreclosure.  No  bank,  however,  is 
allowed  to  hold  property  except  for  its  own  use  and 
occupation  longer  than  twelve  years. 

2.  Warehouse  receipts  as  collateral  security  (Sec- 
tions 84-90). — A  bank  may  lend  money  upon  the  se- 
curity of  standing  timber  and  on  the  rights  held  by 
persons  to  cut  or  remove  such  timber. 

A  bank  is  empowered  to  lend  money  to  a  receiver 
or  hquidator  appointed  under  the  Winding-up  Act, 
and  to  take  security  in  connection  therewith. 

Power  is  given  to  advance  money  for  building  ships 
and  to  take  such  security  thereon  as  is  permissible  for 
individuals  under  the  laws  of  the  respective  provinces. 


38  BANKING  PRINCIPLES 

Power  is  given  to  advance  money  on  warehouse  re- 
ceipts and  bills  of  lading. 

The  provisions  embodied  in  what  is  known  as  "Sec- 
tion 88"  have  proved  an  important  factor  in  the  in- 
dustrial and  agricultural  development  of  Canada. 
The  clause  permitting  loans  to  farmers  under  this 
section  appears  for  the  first  time  in  the  Act  of  1913. 
The  main  text  of  Section  88  is  as  follows: 

The  bank  may  lend  money  to  any  wholesale  purchaser,  or 
shipper  of,  or  dealer  in,  products  of  agriculture,  the  forest, 
quarry  and  mine,  or  the  sea,  lakes  and  rivers,  or  to  any 
wholesale  purchaser  or  shipper  of  or  dealer  in  live  stock  or 
dead  stock  or  the  products  thereof,  upon  the  security  of 
such  products,  or  of  such  live  stock  or  dead  stock  or  the 
products  thereof. 

The  bank  may  lend  money  to  a  farmer  upon  the  se- 
curity of  his  threshed  grain  grown  upon  the  farm. 

The  bank  may  lend  money  to  any  person  engaged  in 
business  as  a  wholesale  manufacturer  of  any  goods,  wares 
and  merchandise,  upon  the  security  of  the  goods,  wares  and 
merchandise  manufactured  by  him,  or  procured  for  such  man- 
ufacture. 

All  advances  secured  under  Sections  86-88  have 
priority  to  the  claim  of  an  unpaid  vendor  unless  he  had 
a  lien,  of  which  the  bank  was  aware,  on  the  goods. 
The  material  or  goods  on  which  a  bank  has  a  lien  by 
warehouse  receipt  or  pledge,  under  Section  88,  may  be 
converted  by  manufacture  without  the  bank  losing 
its  lien  thereon.  In  the  case  of  the  non-payment  of  a 
debt  thus  secured,  the  goods  may  be  sold  under  cer- 
tain specified  conditions. 

A  bank  cannot  acquire  or  hold  any  warehouse  re- 


THE  BANK  ACT  39 

ceipt,  bill  of  lading  or  pledge  of  goods  to  secure  any 
debt  unless  such  debt  is  negotiated  at  the  time  of  the 
acquisition  of  the  security  by  the  bank,  or  upon  the 
written  promise  or  agreement  that  such  warehouse  re- 
ceipt, bill  of  lading  or  security  would  be  given  to  the 
bank.  Such  liability,  however,  may  be  renewed  from 
time  to  time  without  affecting  the  condition  of  the  se- 
curity. A  bank  may  also  exchange  warehouse  re- 
ceipts for  bills  of  lading,  or  vice  versa,  without  affect- 
ing this  security. 

3.  Rates  of  interest  and  eocchange  (Sections  91- 
94 ) . — A  bank  may  stipulate  for,  or  exact  such  rate  of 
interest  or  discount  as  may  be  agreed  upon,  and  may 
receive  in  advance  any  such  rate,  but  no  higher  rate 
than  seven  per  cent  shall  be  recoverable  by  the  bank. 

A  bank  may  allow  any  rate  of  interest  whatever 
upon  deposits.  The  liability  of  the  bank  to  repay 
money  deposited  with  it  is  not  affected  by  any  statute 
of  limitations  or  any  law  relating  to  prescription. 

A  branch  bank,  when  discounting  bills  payable  at 
another  branch,  may  take  commission,  in  addition  to 
interest,  to  an  amount  not  to  exceed  Vs  of  one  per 
cent;  minimum,  15  cents. 

In  discounting  bills  drawn  on  places  where  a  bank 
has  no  branches  this  rate  may  be  increased  to  ^  of 
one  per  cent;  minimum,  25  cents. 

4.  Deposits  (Sections  95-98). — A  bank  may  re- 
ceive deposits  from  any  person,  whether  qualified  by 
law  to  contract  or  not,  and  may  repay  the  same  to 
such  person  unless  the  money  is  lawfully  claimed  by 


40  BANKING  PRINCIPLES 

another.  Where  this  conflicts  with  the  law  of  a  prov- 
ince regarding  minors,  married  women  and  other  per- 
sons not  competent  to  enter  a  contract,  the  total 
amount  received  from  such  person  shall  not  exceed 
$500. 

A  bank  is  not  bound  to  see  to  the  execution  of  any- 
trust  in  relation  to  deposits. 

Provision  is  made  facilitating  the  transmission  of 
deposits  not  exceeding  $500  in  case  of  the  death  of  the 
depositor. 

Official  checks  of  the  Dominion  of  Canada  shall  be 
cashed  at  par  at  the  branches  of  every  bank  in  Canada. 

5.  Purchase  of  the  assets  of  a  bank  (Sections  99- 
111) . — These  sections  provide  for  the  amalgamation 
of  banks  and  set  forth  the  necessary  procedure.  How- 
ever, before  a  bank  can  enter  into  any  agreement  to 
sell  the  whole  or  any  portion  of  its  assets  to  another 
bank,  it  is  necessary  to  obtain  the  consent  of  the  Min- 
ister of  Finance  in  writing.  The  agreement  to  sell 
and  pm'chase  must  then  be  submitted  to  the  share- 
holders of  the  selling  bank  either  at  its  annual  general 
meeting  or  at  a  special  general  meeting  called  for  that 
purpose,  a  copy  of  the  agreement  having  been  mailed 
to  each  of  the  shareholders  at  least  four  weeks  previous 
to  the  date  of  the  meeting. 

To  carry  a  resolution  approving  of  the  agreement 
the  votes  of  shareholders  representing  not  less  than 
two-thirds  of  the  amount  of  the  subscribed  capital 
stock  of  the  bank  are  necessary.  The  agreement  may 
then  be  executed  under  the  seals  of  the  banks,  and  ap- 


CHARTERED    BANKS'    STATEMENT   TO    THE   DOMINION    GOVERNMENT— JULY,    1913 


- 

Capitnl 
Authorijied 

CAPITAL  STOCK 

Amount 
fund 

ll 

H 

LIABILITIES 

■• 

NAWE  OF  BANK 

Capital 

Capital 
PaiS  Up 

.:£.. 

to'brai" 

deducting 

for  credit., 
pay-li.li. 

Balance. 

DcpoEits  by 
the  public. 

mdemnd 

Deposits  by 
in  Canada 

clMWhotC 

in  Canada 

in  Canada 
discounted 

made  by 

other  banks 
in  Canada 

Due  to 

batd^ine 
corrcapond- 

cnl.  ete- 
whcre  tban 
m  Canada 

Bill. 

Accept,        labUjlic. 

under          ocludod 
lettcia  of        tender 

credit           KS* 

Total 
Liabilities 

Aggregate 

nnd  6nna 
Ihcy  arc 

Average 
gowlod 

Dominion 
thecionth 

nm^nl  o( 
"duriMX" 

Bulk  ol  Montreal 

Bank  of  Bhliah  North  Amcric. 

Bank  of  Toronto 

MolaoM  Bank 

25.000,000 
5.000,000 
10.000.000 

4.80I1.GOO 

slooo.'ooo 

5.000.000 
lO.CWO.OOO 
2.000.000 

8.000.000 
25,000.000 
25,000.000 

lO.OOO.OOO 

a.ooo.ooo 

5.000.000 

4.000.000 
5,00«.iX)0 
10.000,000 

3,000.000 
2.000.000 
2,000.000 

6,000.000 
3.000.000 
2.000.000 

1,000,000 

S 

-I6.CO0,ODO 

elooojooo 

4,866.060 

■lioooiooo 

2.000.000 

ciyMjoo 

1,000,000 
5,000,000 

ii!5oo;ooo 

5.655,.5O0 
3,000,000 
2;847;200 

3;fl52;700 
7.000.000 

3.000,000 
1,000,000 
2,000.000 

2.862,100 
632,200 

10.000,000 
2,703.120 
5.DS1.150 

4.S06.660 
5.O0I).O00 
4,000,000 

2.000.000 
6,7iM.700 
1,000,000 

5.000.000 

IS.OOO.OOO 

5.473.232 
3.000.000 

2,002,510 

0,022  !388 

3,000.000 
1.000.000 
1.039.330 

2.786.284 
1.133,340 

i 

16,000.000 
1,250.000 
10,863,010 

2,920.000 
6,000,000 
4,700.000 

1.550,000 
0,419,175 
676,000 

3.300,000 
12,500,000 
12,500,000 

6.473.232 
3.5OO.000 
3,302.516 

3.000,000 
4.441.300 
7.000,000 

10 
9 

» 

14.1S8.22S 

51275:926 

4.110,453 
4.418.402 
3.507.025 

°'U24:178 

4.600,474 
12.921.535 

2.'5.55;3n0 
2,250.883 

3,016.465 

6.'098.'027 

26.346 

1.615:825 

1,016:505 

201.070 

t 

2.684.695 

452,039 

45,535 
55.500 
63.294 

23.248 
3M,522 
.20,489 

141,408 
1.801.548 
219.515 

243:749 

32.349 
83.442 
241,573 

S 

2.S41.305 

213:665 

652.690 
70.020 
111.400 

150.107 

192:240 

13.208.249 

6:472:314 

16S.328 
1.279.069 

351:573 
1.983.956 

S 

49.500.886 

38:625:800 

13,322,945 

9:920:303 

3,269.404 

1:715:955 

17.618,375 
72.172.579 
31.041.292 

16.870.327 
9,018,718 
10.358.043 

4.767.426 
9:i57:3«7 
20  506.816 

S 

'       ' 
22,691.529 
20:777:441 
20.678.917 

13.306.806 
38.655,150 
6.396,029 

28,430.303 
87.385,741 
71.823,768 

39,445,924 
24,398.377 
23,424,633 

29:878:046 
34.180.887 

27.548.498 
11.191.494 
2.451,123 

1.096.833 
225,733 
97:333 

455,245 
16.572,397 
25,820,690 

1,140,848 

S 

'250:000 
109,343 

18,026 

91:751 

3,034 
864,304 

324,970 
505:805 

1:207 
769.062 

> 

42.219 
355.359 
52.574 

12.122 

1:530 

393.703 

1:216:666 

1.131.686 
6,183.990 
228,418 

75,220 
24.5,620 
682.071 

1.000.119 
628,873 

i 

815.298 

516:i81 

416.736 
115,043 
180.309 

32.245 
642:289 

3.386:861 

117.362 
66.431 

12S:055 
1&1.065 

« 

1.839,078 
19,613 

5.045.797 

2.575.617    .. 
60:240 

'712.'319 
79.053 

6.544 
106.042 

< 

10,372 
,256.455 

207,577 
22:789 

'7,677 
4,392 

> 

1»7,005.329 
17,021.240 
01.333.109 

64.355.618 
46.569.873 
41.023.240 

30.516.091 
60.148.317 
10.605.229 

66.135.383 
220.140.683 
151.021.206 

64.369.942 
37.798.541 
37.926,346 

43:057:813 
63.513.U6 

3J88.346 
10.265.807 
10.975.891 

15.202,534 
7,468,886 
2,130,850 

074,653 

517;570 

08,425 
82,771 
610,264 

436,806 
674.345 

8.081.600 
373.787 
4.048.054 

976.527 

66i;220 

150.290 

2.118,402 

64.025 

6,876".000 
6.005, 181 

1.024.800 

311,817 
i:676:506 

1 

'735:921 
5,475,446 

3,187,192 
3,670,137 
3,983.348 

1,038,336 

4,983,410 

168,854 

it:?i1:S 

13.146.020 

5,346.610 

l[053|420 

1.623.114 
2.774,523 
10,257,210 

$ 

15.6ie.46S 
2.000.305 
6,553,607 

4.560.703 
4.808.800 
3.SS2.827 

t. 065,840 
0.060.860 

5.010,634 
13,827.000 
10.019,177 

5.328,000 
2,868.105 
2,400.683 

3.302.017 
3.810.SO0 
0,839.407 

20.346 
084,802 
1,807,600 

2.225.400 
1,001,606 
006.700 

206,286 

2 

B.„,uoP,ov.„™l.doCa„od. 

48,9,50     .. 
1:143:536 

800.800 

'700!833 

692.814 

1371600 

401.027 
436.052 

10 

Caoadinii  Hunk  uf  Cwmmcrco 

11.504.480 
775,784 

D^      ■       B     k 

1. 

JtaittS-ofcanada::::::  :: 

130,613    .. 
162,978    .. 

42,382 
178,170 

6i;»12 

15 

437 
144.229 

Imperial  Bank  of  Canada 

18 

i,,762,001 

1,250,000 
650.000 

300.000 
300.000 
40,000 

66,000 

..!.. 

65.744 
16.862 

'155:843 
62.696 

2.653:781 

4.616.9&1 
2.0S3.749 
665.864 

388.540 

5,598.636 
0,613.794 

4:056:971 
816.566 

343.684 

2:628 
109:423 

347.035 
73.000 

82,863 

554,119 
73,376 

168.232 
44.378 
89,684 

160,209 
96,935 

283,285 

20:400 

12.240 

744".023 

526;887 
213.500 

„ 

N  rthe      C  own  B  nk 

40.416 

73.534 

8.886 
1.841 

"1 

61.112 

3.438 

We  b        So      ■      B     k 

41.557 

100.860,660 

118.190.066 

110,520,153 

108,050.633 

99.143.411 

6.700.046 

34,075.596 

356.585,196 

621.347.388 

86,660,194 

14.228.085 

9.713.020 

21.169.142 

11,134,246  1 

8,637,905 

1,275,297,267 

10,105.310 

37,107,557  1    91,666,478 

108,178,424 

^ 

ASSETS 

ASSETS 

A 

/ 

NAME  OF  BANK 

Current  Gold  and  Sub- 
sidiary Com 

minion  Not. 

III 
11 

1 
1 

■-1 

I 
0 

bS 

Cheques 

Ir 

Canada 

bSs 

pondents 
United 

bk»"irnd 
bankinK 

pSSKt. 

else- 
than'fn 

(Svera- 

fill 

If 

Ml  2 

Other 
and 

CaU  and 

Canada 
on  .locks, 
debeo- 

bonds 
(not  ex- 
ceeding 
30  days) 

elso- 

(not  es- 
mdayl) 

Othet 
Canada 

Other 

.  aSd' 
clao^  ** 

Canada 

II 

|9 

Govem- 

dtlSs" 

otptlKIcs 

ind 

sitool 

diiticU 

Sbl 

Reol 
other 

Mort- 

by  the 
bank 

Uiao 
°i(°aw) 

IJabili- 
oredit 

ossoU 

irti 

In 

El«- 

Total 

— 

Tctal 

, 

(juciwcBank  .  .■■,:::::::' 

» 

7,051,963 
2.086:892 

t 

3.070.257 

s 

4,1781484 

s 

10.474.291 
6.662:288 

S 

■4'.2io 

S 

10.474.291 
6.566:501 

790,000 
121,000 
244,793 

* 

s 

1,913,121 
146,234 
754,905 

S 

2,63i 

59t 

* 

298,246 

8 

S 

5,348,416 
1,663:671 

$ 

520,125 
682,'643 

s 

540,591 
252,446 

S 

11.826 
1.939 
3.288 

)76 

< 

■2,'217.589 
4,157,578 

> 

s 

113,788,072 
12,251,957 
38,608,604 

S 

8,425,825 

s 

301,214 

6,404,440 
»6:669 

75.325 
165.019 
184.017 

S 

1,622 
48J50 

S 

79,997 

t 
4.000,000 
i:608:518 

< 
2,675,617 

< 

1,176,813 
148,535 

% 

231.668.309 
21.206.778 
78.680.048 

2 

3 

2.091.592 

1.108.060 

6,523,915 

5,115,038 

150,439 

F,SS°o',Ki,r"•^'^":'''" 

801.354 
863,079 
562,496 

185.315 
1.380.467 

5.322:663 
1.896.787 

164.180 

968,540 
863,079 
662,400 

2,1391497 
69.034 

1.166,188 

6!834;690 

2.908.084 
3.870.647 
3,643.901 

1,534,530 
5,123,174 
308,244 

4,012,515 
10.303,001 
11.863.778 

13 
288 

12.302 

a.098.097 
3.870.647 
3.643,904 

1.634.824 
5,123.174 
308.244 

4.612.570 
19.315,904 
11.803.953 

1,436,748 
228.000 
200,000 

100,000 
325,000 
52,000 

240.000 
738.500 
578.000 

368:418 
349,892 

428,195 
746,307 
208,007 

708,030 
1.475.274 
2,571.739 

2',43! 

820 
3,516 
495 

2,572 
5:961 
5,276 

694 
05f 
271 
343 

220 
542 

128,666 

26,433 
8,101 
22,429 

67,256 
699',001 
136,401 

11,'973 

95.420 

1,041,356 
1,152,081 

410,371 

55:190 

801,818 
4,439,293 
2,187,807 

'l'l'l',472 
437,000 

697:866 

873,754 
518,899 
1,103,623 

2,495:725 
2,646,355 

1.644 

1.035 
4.350 

056 
526 

438 

2,523,890 

1:712:574 
8:463:850 

8,561,393 

27,609,874 

14.518,020 
5:220:778 
44,795,429 
88:327:585 

.'■'™'''" 

.';"' 

4,100,247 
2.881.317 
(82.139 

512.569 
1,115,716 
248,597 

3,739,229 
4,100,519 
3,316,662 

151:574 
290.310 

72:017 

179.594 
024.079 
417:762 

12,349 

■177.O62 

208,377 
207,805 

800 

■l'4'.532 

85,207 
16.009 
38.909 

83.088 
419:177 

1,566,310 
2,578,220 
1,260.000 

664.493 

'  il'.BM 

1.283.217 

5:998:345 

1,732,207 
712,319 
70,053 

0,544 
106,042 

3.639,792 

64,322,311 
68.506,581 
50,400,636 

24,310,606 
80.022.016 
12,401,845 

76.368.646 
260,670.288 
177,121,952 

041.881 

■2'3'9.i2i 

16.682 
162.791 
143.740 

76:741 

8.450 
760.000 

7 

Mt^rchantA  Bank  of  Canada. . . 
Danque  Provinolale  du  Canada 

Union  Bank  of  Canada 

Royal  Bank  of  Canada 

559,829 

620,707 
2,594,156 
1,185,112 

2,982,973 

131,420 

27.920 
601.917 

386.734 
2.181.568 
4.937.909 

5,903,776 
10,625,189 
8,092,725 

079.798 
10.921  .,53S 

140 
214,8.57 

48,950 
1:143:531 

1( 

Dominion  Bank 

Bank  of  Hamilton 

Btandard  Bank  of  Canada 

1.644.908 
57s:o'52 

474 

'739;859 
578.052 

5.518.614 
2:100:214 

6,518,614 
3,321,191 
2,106,214 

260.000 
150.000 
130.000 

.546.908 
235.'32C 

2.268 
1.490 
1.878 

,54s 
809 

9,506 

'  '276,i3i 
196,127 

130.258 

1,267,726 
177,430 
924,215 

431,302 
698;ilC 

579.623 
1:214:778 

0.007 
76S 

753 
245 
025 

5,066,801 
1.333,298 
2,905,226 

°','"° 

48,000,276 

86.646 

::;■;■■   i'"''M? 

l?"'"i  1, /,:''" 

956.359 

2,945,453 

?:K'ii 

766.2* 
162:971 

■266'.i63 
14.008 

77,483.470 
46.116.234 
44.280.774 

U 

Banque  d'Horhulaga 

Bank  of  Ottawa 

Iiuperial  Bank  of  Canada 

306.521 
1,033.143 

306.521 
1,033,143 
1.686,527 

1.S7S.281 
2,HK3,079 

1,078.281 
,2«8i(,079 
10*19,402 

123.300 
185.657 
326.350 

023:831 

4:24! 

471 
889 

980 

338,729 
664:791 

■4,499.338 

70.727 
509.499 
2.096.501 

899,974 
1,299,327 
657.268 

1.628.949 
2.029.695 
1.166.470 

82! 
803 

549 

472,480 
768,522 
4,504,486 

^''-r'sss 

i  iiu  17^  ; ;; ,  ;,'„ 

i':.i':' 

4'56:784 

816,510 
1,064,793 
2,093,027 

42.382 
178,170 
193,862 

143.471 
1.000 
43.496 

32.231.035 
63.062.164 
70.720,793 

16 
1! 

21 

Bovereign  Bank  of  Canada 

BomeTJank  of  Canada'.'. '.'.'.'.. 

■l'65,306 
98.222 

'  '165,396 
98,222 

■697.326 
803.050 

'■'697,326 
863,050 

27,320 
89:60( 

141  '04! 

4m 

375 

Vss'.iii 

101.038 

'^Mi 

"l6b'.4i6 
71.472 

■4'5',i93 

■29'l'.373 
34.818 

1.000 
1.089 
293 

000 
58! 

■93^8.874 
1,843,044 

8,'2'5i;223 

""6^8"658 
242,863 

67,904 

■1,466 
6.931 

■378,571 

■  ■  ■  ■82,853 

3.674,231 
■  ■  ■  ■3.™ 

4,601.651 
13:059'.27^ 

i 

22 

24 

Northern  Crown  Bank 

Sterling  Bank  of  Canada 

Bank  of  Vancouver 

288.842 
67,518 
21.569 

238,842 
57.518 
21. .'.00 

873.703 
613.044 
220.645 

»3,703 
613,044 
220,645 

53:741 

165.315 
36:4 1( 

1.11( 

170 
412 

102.252 
I0.00( 

...^T.' 

224:87: 
62.905 

65,000 

125.241 

610 

805 
306 
568 

643.14f 
'275:o6{ 

13,117,275 

7,135 

898,780 
156.200 
83,133 

114,041 
10,385 
76.372 

44,088 
1,62s 

97.669 
15.000 

359,245 
311,69 

■  3,438 

76.403 
56:39 

0,026,678 
3,076.011 

21 

25 

Wcybum  Soourily  Bank 

12.656 

12.656 

73.176 

73,170 

13,003 

6.310 

,,.'° 

'™ 

,"•"" 

39,883 

■■':::: 

." 

465 

882,269 

35.456 

19.607 

1,800 

118,606 

39.609 

28.582.779 

13.590.170 

42.172.049 

00,994,035 

17.055 

91,011,691 

6,616,333 

!~ 

12.908,203 

17.819.945 

138,100 

3.588.051 

9,201,280 

24,802,702  10,958,221 

22..584.905 

73,097,295 

67,991,255 

80,260,235 

858,429,069 

42.960.513 

2.111,836 

13.121.384 

4.29I,20S 

1,340,100 

2.471.176 

10,800,616 

11,134,246 

9.912.824 

1.619.817.013 

_ 

o 
r 

o 


T.    C.    BOVILLE 

Deputy  Minister  of  Finance 


^ 


THE  BANK  ACT  41 

plication  made  to  the  Governor-in-Council,  thru  the 
Minister,  for  approval  thereof. 

The  approval  of  the  Governor-in-Council  is  not 
given,  however,  until  the  Minister  is  satisfied  that  all 
the  requirements  of  the  act  have  been  complied  with 
and  the  necessary  publicity  given  by  the  insertion  of 
notices  in  the  Gazette  and  certain  newspapers.  The 
approval  by  the  Governor-in-Council  of  the  agree- 
ment will  then  be  evidenced  by  a  certified  copy  of  the 
Order-in-Council  approving  thereof. 

The  notes  of  the  selling  bank,  of  course,  cannot  be 
reissued,  but  must  be  called  in,  redeemed  and  cancelled 
as  quickly  as  possible. 

6.  Returns  to  government  (Sections  112-114). — 
Banks  must  send  a  statement  in  a  specified  form^  at 
the  end  of  each  month  to  the  Minister  of  Finance. 
The  statement  must  be  signed  by  the  chief  accountant 
and  by  the  president  and  general  manager,  or  persons 
duly  authorized  to  act  in  their  stead. 

The  Minister  of  Finance  may  call  for  special  re- 
turns from  any  bank  at  any  time. 

A  bank  at  the  end  of  each  calendar  year  shall  trans- 
mit to  the  Minister: 

(a)  Detailed  returns  of  all  unpaid  dividends,  bills  of  ex- 
change, drafts  and  certified  checks  outstanding  for  more  than 
five  years  and  of  all  balances  in  respect  of  which  no  transac- 
tions have  taken  place  or  upon  which  no  interest  has  been 
paid  during  the  five  years  prior  to  the  date  of  such  return ; 

(b)  A  list  of  shareholders  with  their  addresses  and  the 
number  of  shares  held  by  each. 

1  See  combined  statements  of  all  banks,  Figure  2. 


RETURN  OF  THE  TOTAL  LIABILITIES 
CANADIAN  BANKS  AS  REPORTED 


Percentage  to 

Total 
Assets 

Liabilities 
to  Public 

Capital   authorized    

Capital   subscribed    

$190,866,666 
118,190,966 
116,520,153 
108,959,833 

12.56 
7.78 
7.67 
7.17 

14.97 
9.27 
9.14 

Amount  of  rest  or  reserve  fund 

Rate  per  cent  of  last  dividend  declared. 

8.54 

LIABILITIES 

$99,143,411 

6,760,046 
34,075,596 

356,585,196 

621,347,388 
86,600,194 

6.52 

.44 
2.24 

23.47 

40.89 
5.70 

.39 
.94 

.64 

1.39 

.73 

.56 

7.77 

2  Balance    due    to    Dominion    Government 

after  deducting  advances  for  credits, 
pay-lists,   etc 

3  Balances  due  to  Provincial  Governments 

4  Deposits   by   the  public,   payable   on   de- 

.53 
2.67 

27.96 

5  Deposits    by    the    public,    payable    after 

notice  or  on  a  fixed  day,   in  Canada. 

6  Deposits  elsewhere  than  in  Canada .... 

7  Loans  from  other  banks  in  Canada,  se- 

8  Deposits   made  by   and  balances   due  to 

48.73 
6.79 

6,002,957 
14,228,085 

9.713,020 
21,169,142 
11,134,246 

8,537,905 

.47 

9      Due   to  banks    and  banking   correspond- 
ents in   the   United  Kingdom 

10      Due   to  banks    and   banking   correspond- 

1.12 

.76 

11  Bills  payable    

12  Acceptances  under  letters  of  credit.  .  .  .  ' 

13  Liabilities  not  included  under  foregoing 

1.66 
.87 

.67 

$1,275,297,267 

83.93 

100.00 

Aggregate  amount  of  loans  to  directors, 

and  firms  of  which  they  are  partners. 
Average    amount    of    current    gold    and 

subsidiary  coin  held  during  the  month 
Average  amount  of  Dominion  notes  held 

during  the  month    

Greatest  amount  of   notes   in   circulation 

at  any  time  during  the  month 

$10,105,316 
37,107,557 
91,656,478 

108,178,424 

.66 
2.44 
6.03 
7.12 

.79 
2.91 
7.19 
8.48 

/  declare  that  the  above  return  has  been  prepared  under  my  directions  and  is 


We  declare  that  the  foregoing  return  is  made  up  from  the  bools  of  the  Bank, 
clearly  the  financial  position  of  the  Bank,  and  we  further  declare  that  the  Bank  has 
ion  notes  less  than  forty  per  cent  of  the  cash  reserves  which  it  has  m  Canada. 

this day  of 19.  .  .  . 


Figure  2 
42 


Form  Prescribed  for 


AND  ASSETS  OF  ALL  THE 

TO   THE    GOVERNMENT  On  the  Thirty-first  Day  of  July,  1913 


Percentage  to 


ASSETS 


Total      Liabilities 
Assets      to  Public 


10 


15 


17 

18 
19 
20 

21 
22 
23 
24 

25 

26 


Current  gold  and  subsidiary  coin : 
In   Canada,    $28,582,779. 
Elsewhere,      $13,590,170 

Dominion  notes : 

In   Canada,    $90,994,635. 

Elsewhere,  $1 7,055 

Deposit  with  the  Minister  of  Finance  for 
the  security  of   note  circulation 

Deposit  in  central  gold  reserves 

Notes  of  other  banks    

Checks  on   other  banks 

Loans  to  other  banks  in  Canada,  secured, 
including    bills    rediscounted 

Deposits  made  with  and  balances  due 
from  other  banks  in  Canada 

Due  from  banks  and  banking  correspond- 
ents in  the  United  Kingdom 

Due  from  banks  and  banking  correspond- 
ents, elsewhere  than  in  Canada  and 
the  United  Kingdom 

Dominion  government  and  provincial 
government  securities    

Canadian  municipal  securities,  and  Brit- 
ish, foreign  and  colonial  public  securi- 
ties other  than  Canadian 

Railway  and  other  bonds,  debentures, 
and  stocks    

Call  and  short  (not  exceeding  thirty 
days)  loans  in  Canada  on  stocks,  de- 
bentures  and   bonds    

Call  and  short  (not  exceeding  thirty 
days)  loans  elsewhere  than  in  Canada 

Other  current  loans  and  discounts  in 
Canada  

Other  current  loans  and  discounts  else- 
where than  in  Canada    

Loans  to  the  Government  of  Canada  .... 

Loans  to   provincial   governments 

Loans  to  cities,  towns,  municipalities 
and   school   districts 

Overdue  debts   

Real  estate  other  than  bank  premises .  . 

Mortgages  on  real  estate  sold  by  the  bank 

Bank  premises,  at  not  more  than  cost, 
less  amounts   (if  any)   written  off.  .  .  . 

Liabilities  of  customers  under  letters  of 
credit  as  per  contra    

Other  assets  not  included  under  the  fore- 
going heads   


$42,172,949 

91,011,691 
6,616,333 


12,908,263 
47,819,945 

138,100 

3,588,651 

9,201,286 

24,892,762 
10,958,221 

22,584,905 
73,697,295 

67,991,255 
89,266,235 

858,429,069 
42,960,513 

'    2,111,836 

43,121,384 
4,291,208 
1,340,100 
2,471,176 

40,896,616 

11,134,246 

9,912,824 


$1,519,517,013 


5.99 
.44 


3.31 

7.14 
.52 


.85 
3.15 

1.01 
3.75 

.24 

.28 

.61 

.72 

1.64 

1.95 

.72 

.86 

1.49 

1.77 

4.85 

5.78 

4.48 

5.33 

5.87 

7.00 

56.49 

67.32 

2.83 

3.37 

.i4 

'  '.ie 

2.84 
.28 
.09 
.16 

3.38 
.34 
.10 
.19 

2.69 

3.21 

.73 

.87 

.65 

.79 

100.00 

119.15 



correct  according  to  the  books  of  the  bank. 


Chief  Accountant. 
and  that  to  the  best  of  our  knowledge  and  belief  it  is  correct,  and  shows  trithj  and 
never,  at  any  time  during  the  period  to  which  the  said  return  relates,  held  in  Domin- 


Individual  Statement 


Figure  2  —  continued 
43 


President. 
General  Manager. 


44  BANKING  PRINCIPLES 

7.  Payments  to  the  Minister  of  Finance  upon  dis- 
solution of  a  hank  (Sections  115-116). — The  liqui- 
dator of  a  bank  must,  after  three  years,  pay  to  the 
Minister  of  Finance  all  amounts  due  to  shareholders 
or  depositors  remaining  unclaimed,  together  with  all 
interest  due.  The  government  will  hold  the  money 
in  trust  for  the  owners  and,  in  case  of  interest-bearing 
deposits,  will  continue  to  allow  for  six  years'  interest 
at  the  rate  of  three  per  cent  per  annum. 

Liquidators  of  banks  are  also  required  to  pay  to 
the  Minister  of  Finance  within  three  years  an  amount 
equal  to  the  excess  of  the  outstanding  notes  in  circu- 
lation over  the  amount  at  the  credit  of  the  bank  in  the 
Circulation  Fund,  the  same  to  be  held  by  the  govern- 
ment for  the  purpose  of  redeeming  such  notes. 

8.  Canadian  Bankers'  Association  (Section  117- 
124). — In  the  event  of  the  suspension  of  a  bank  the 
Canadian  Bankers'  Association  is  intrusted  with  the 
appointment  of  a  curator  who  continues  to  supervise 
the  affairs  of  the  bank  until  it  resumes  business  or  until 
a  liquidator  has  been  appointed  to  wind  it  up.  v 

The  association  may  make  by-laws,  rules,  and  regu- 
lations respecting: 

(a)  All  matters  relating  to  the  appointment  or  removal 
of  a  curator,  and  his  powers  and  duties ; 

(b)  The  supervision  of  the  making  of  the  notes  of  the 
banks  which  are  intended  for  circulation,  the  delivery  thereof 
to  the  banks,  the  disposition  made  of  them,  and  their  final 
destruction ; 

(c)  The  custody  and  management  of  the  central  gold 
reserves  and  the  carrying  out  of  the  provisions  of  this  act 
relating  to  such  reserves. 


THE  BANK  ACT  45 

No  such  by-law,  rule  or  regulation,  however,  shall 
be  in  force  until  approved  by  the  Treasury  Board. 

9.  Insolvency  (Section  125). — In  the  event  of  the 
property  and  assets  of  a  bank  being  insufficient  to  pay 
its  liabilities,  each  shareholder  shall  be  liable  for  the 
deficiency  to  an  amount  equal  to  the  par  value  of  the 
shares  held  by  him,  in  addition  to  any  amount  not  paid 
up  on  such  shares. 

10.  Suspension  (Sections  126-131). — The  non- 
payment in  specie  or  Dominion  notes  of  any  of  its  lia- 
bilities, as  they  accrue  for  ninety  days  consecutively, 
constitutes  a  bank  insolvent  and  suspends  the  working 
of  its  charter.  The  charter  shall  remain  in  force  a 
length  of  time  sufficient  only  to  enable  the  directors  to 
make  and  enforce  the  calls  on  the  shareholders  deemed 
necessary  to  pay  all  the  liabilities  and  to  wind  up  the 
business  of  the  bank.  The  total  amount  of  such  calls 
is  limited  by  Section  125. 

Shareholders  of  a  bank  who  have  sold  or  transferred 
their  stock  are  not  relieved  from  the  double  liability 
until  the  expiration  of  sixty  days. 

In  case  of  insolvency  the  payments  of  notes  then  in 
circulation  shall  be  the  first  charge  on  the  assets  of 
the  bank,  the  second  charge  being  the  payment  of 
money  due  to  the  Dominion  government,  and  the  third 
charge  the  payment  of  the  money  due  to  the  Provin- 
cial government. 

11.  Penalties  (Sections  131A-158). — The  remain- 
ing sections  deal  entirely  with  offenses  against  the  act 
and  the  penalties  incurred.     The  majority  of  the  pen- 


46  BANKING  PRINCIPLES 

allies  are  applicable  to  banks  and  bank  officers,  but 
the  following  five  may  be  incurred  by  the  public : 

For  selling  or  transferring  shares  contrary  to  the  require- 
ments of  the  act ; 

For  issuing  or  drawing  any  instruments  intended  to  cir- 
culate as  money  or  to  be  used  as  a  substitute  for  money ; 

For  mutilating  or  defacing  bank  notes  or  Dominion  notes ; 

For  making  false  statements  in  connection  with  ware- 
house receipts  or  bills  of  lading,  or  for  wilfully  disposing  of 
or  withholding  from  the  bank  goods  covered,  by  security 
under  Section  88,  an  indictable  offense; 

For  using  the  word  "Bank,"  "Savings  Bank,"  "Banking 
Company"  or  any  equivalent  term  without  being  authorized 
to  do  so  by  the  act,  nor  can  any  words  in  a  foreign  language 
with  a  similar  import  be  used. 

12.  Amendments  to  Bank  Act  during  1913-1916. 
— At  the  outbreak  of  the  war  in  August,  1914,  the  Do- 
minion Government  extended  the  emergency  currency 
privilege  thruout  the  whole  year,  instead  of  limiting  it 
to  the  usual  period  from  September  first  to  February 
twenty-eighth.  It  also  authorized  the  chartered 
banks  to  make  pajments  in  bank  notes  instead  of  in 
gold  or  in  Dominion  notes,  until  further  official'  an- 
nouncement. Neither  of  these  amendments  were 
availed  of  to  any  appreciable  extent. 

An  amendment  to  section  88  of  the  Bank  Act  was 
made  in  March,  1915,  permitting  the  banks  to  lend 
money  to  farmers  for  the  purchase  of  seed  gi*ain  upon 
the  security  of  the  gi'ain  and  the  subsequent  crop. 
This  privilege  was  availed  of  to  a  very  limited  extent 
as  the  banks  were  content  in  most  cases  to  rely  upon 


THE  BANK  ACT  47 

the  general  credit  of  the  borrower,  as  they  had  in  the 
past. 

In  INIay,  1916,  another  amendment  to  Section  88  of 
the  Bank  Act  was  passed,  permitting  banks  to  loan 
money  to  a  farmer  or  to  any  person  engaged  in  stock 
raising  upon  the  secm'ity  of  live  stock.  In  provinces 
where  chattel  mortgages  are  legal  the  security  of  the 
live  stock  must  be  taken  in  the  form  of  a  chattel  mort- 
gage duly  registered.  In  any  province  in  which  there 
are  no  statutes  or  ordinances  in  force  relating  to  bills 
of  sale  or  chattel  mortgages,  security  may  be  taken  by 
way  of  an  assignment,  but  a  memorandum  of  such  se- 
curity must  be  published  in  the  Official  Gazette  of  the 
Province  within  thirty  days  after  the  date  of  the  as- 
signment. These  onerous  requirements  defeated  the 
object  of  the  amendment  and  little  advantage  was 
taken  of  it.  The  borrower  naturally  objected  to  the 
publicity  incurred  and  the  banks  on  their  part  were 
unwilling  to  undertake  the  responsibility  and  work  en- 
tailed by  such  a  transaction. 

13.  Bills  of  Ecvchange  Act. — The  whole  business  of 
banking  is  so  intimately  concerned  with  negotiable  in- 
struments and  the  laws  governing  their  existence  and 
validity  that  a  fair  knowledge  of  the  general  principles 
of  the  Bills  of  Exchange  Act  is  essential  even  to  the 
youngest  bank  clerk,  and  such  knowledge  is  best  ob- 
tained by  a  study  of  the  act  itself.  For  this  reason 
little  or  no  attempt  has  been  made  in  this  book  to  ex- 
plain the  nature  of  the  various  classes  of  negotiable 
instruments.     Copies  of  the  act  are  easily  obtainable — 


48  BANKING  PRINCIPLES 

if  annotated,  so  much  the  better,  and  every  student  of 
banking  should  make  a  systematic  study  of  the  act 
until  it  is  thoroly  mastered.  Concise  notes  should 
be  taken  under  the  different  heads,  and  sufficient  space 
left  for  comments  or  illustrations  gathered  from  ac- 
tual experience  or  from  legal  decisions.  This  rough 
classification  gives  an  idea  of  the  scope  of  the  act: 

Sections     1-16     Interpretation    and   general   provisions    of 
the  act. 

17-164^  Bills  of  Exchange. 

17-34     Form  of  bill  and  interpretation. 

35—39     Acceptance  and  interpretation. 

40—41     Delivery  and  oral  evidence. 

4^-46     Computation    of   time,    non-juridical   days 
and  days  of  grace. 

47—52     Capacity  and  authority  of  parties. 

53-59     Consideration. 

60-74     Negotiation  of  bills. 

75-84     Presentment  for  acceptance. 

85—94     Presentment  for  payment. 

95-126  Dishonor  and  protest. 
127-138  Liabilities  of  parties. 
139-146  Discharge  of  bill. 
147—164  Miscellaneous. 
165-175  Checks  {Crossed  checks). 
176—187  Promissory  notes. 
Schedule. 

The  Bills  of  Exchange  Act,  like  the  Bank  Act,  is 
a  Dominion  statute  and  is  largely  based  on  and  fol- 
lows, almost  word  for  word,  the  English  Bills  of  Ex- 
change Act.^ 

1  Copies  of  the  Bills  of  Exchange  Act  can  be  obtained  by  forwarding 
twenty  cents  to  the  King's  Printer,  Ottawa. 


THE  BANK  ACT  49 


REVIEW 

What  are  the  powers  and  limitations  of  a  Canadian  bank? 
What  are  the  regulations  governing  deposits  ? 
What  information  must  a  bank  submit  to  the  Minister  of  Fi- 
nance each  year? 

Under  what  conditions  is  a  bank  declared  insolvent? 


XVI— 5 


CHAPTER  V 

NOTE  ISSUES  AND  THE  BRANCH  SYSTEM 

1.  Monetary  system. — The  monetary  system  of 
Canada  consists  of  gold,  paper  cmTency,  and  silver 
and  copper  subsidiary  coins,  the  latter,  however,  not 
being  legal  tender  for  amounts  over  $10  and  25  cents 
respectively.  The  unit  is  a  dollar  of  23.22  grains  of 
pure  gold.  Gold  coins  in  the  United  States  and  the 
British  sovereign  (worth  $4.86%)  are  legal  tender  for 
any  amount,  and  still  form  the  bulk  of  the  gold  re- 
serves of  the  government  and  of  the  banks,  as  it  is 
only  of  recent  years  that  Canada  has  had  a  distinct- 
ive gold  coinage  of  its  own.  Gold  coin  is  seldom  seen 
in  circulation  and  its  use  is  practically  confined  to  re- 
serve pm'poses  and  international  exchange  operations. 
Silver  is  used  for  the  subsidiary  coins  of  the  denomi- 
nations from  five  to  fifty  cents  and  copper  for  the 
cents.  With  these  exceptions,  paper  currency  is  prac- 
tically the  only  form  of  money  used  in  Canada.  It 
consists  of  two  kinds,  Dominion  notes  and  bank  notes. 

Dominion  notes,  or  "legal  tender,"  as  they  are  often 
called,  are  issued  by  the  Dominion  government  under 
the  authority  of  the  "Dominion  Note  Act,"  which  per- 
mits an  unlimited  issue  under  the  following  conditions : 
the  Minister  of  Finance  shall  always  hold  for  the  se- 

50 


NOTE  ISSUES  51 

ciirity  and  redemption  of  Dominion  notes  up  to  and 
including  $30,000,000,  issued  and  outstanding  at  any 
one  time,  an  amount  equal  to  not  less  than  25  per 
cent  of  the  amount  of  such  notes  in  gold,  or  in  gold 
and  securities  of  Canada,  the  principal  and  interest 
of  which  are  guaranteed  by  the  government  of  the 
United  Kingdom.  The  amount  held  in  gold,  how- 
ever, shall  never  be  less  than  15  per  cent  of  the  notes  so 
issued  and  outstanding.  As  security  for  the  redemp- 
tion of  Dominion  Notes  issued  in  excess  of 
$30,000,000,  the  Minister  must  hold  an  amount  in 
gold  equal  to  such  excess.  The  total  amount  of  gold 
and  specie  held  by  the  government  on  June  30,  1913, 
was  $100,437,593,  of  which  $93,863,538  was  held  in 
connection  with  the  outstanding  amount  of  Dominion 
notes  on  that  date  as  follows : 

Gold  held 

Total  amount  of  outstanding  cir- 
culation     $116,363,538 

Less  amount  protected  by  25% 

of  gold   ' 30,000,000     $7,500,000 

Excess  over  $30,000,000  pro- 
tected by  full  amount  of 
gold    ..* 86,363,538     86,363,538 

Total  gold  held  account  Do- 
minion   notes $93,863,538 

The  total  amount  of  gold  held  by  the  banks  at  the 
same  date  was  $37,944,392  (a  small  proportion  of  this, 
perhaps  three  of  four  per  cent,  being  subsidiary 
silver),  making  a  total  of  $138,381,985  of  gold  held 


52  BANKING  PRINCIPLES 

by  the  banks  and  the  government  or,  allowing  for  the 
silver,  about  $133,000,000.  This  amount  will  repre- 
sent the  total  gold  holdings  of  Canada,  as  there  is 
practically  none  in  circulation  among  the  public.  If 
any  British  or  American  gold  is  paid  out  by  tourists 
or  others,  it  is  immediately  exchanged  or  deposited 
at  a  bank. 

The  total  amount  of  circulating  notes  in  the  hands 
of  the  pubhc  on  June  30,  1913,  was,  in  round  figures, 
$127,500,000,  of  which  $105,700,000,^  (or  over  82  per 
cent)  was  in  the  form  of  bills  issued  by  the  chartered 
banks,  the  balance  $21,800,000,  being  in  the  form  of 
Dominion  notes.  These  figures  will  give  an  idea  of 
the  important  part  the  bank  circulation  has  jilayed  in 
tlie  upbuilding  of  the  country.  Valuable  as  the  note 
issue  privilege  is  to  the  banks  it  has  proved  even  more 
valuable  to  the  country,  since  to  the  banks,  as  well  as 
the  railways,  may  be  ascribed  the  credit  for  the  phe- 
nomenal development  of  Canada  during  the  past 
twenty  years. 

2.  Dominion  notes. — Dominion  notes  are  legal  ten- 
der for  any  amount,  and  maj'-  be  redeemed  at  the 
offices  of  the  Assistant  Receivers  General  situated  in 
the  various  provincial  capitals.  They  may  be  issued 
in  any  denomination,  but  the  one  and  two  dollar  bills 
are  practically  the  only  denomination  in  active  circula- 
tion, the  larger  bills  being  used  principally  by  the 
banks  for  clearing  and  reserve  purposes. 

1  From  this  should  be  deducted  about  $11,000,000  representing  the 
amount  of  bills  in  process  of  clearing  between  the  banks,  and  held  in  the 
tills  of  the  several  banks  as  "bills  of  other  banks." 


NOTE  ISSUES  53 

The  government  statement  of  June  30,  1913,  shows 
the  following  amounts  outstanding: 


Provincial  and  fractional  $769,426 

$1 12,750,790 

$2 9,340,820 

$4 109,717 

$5 5,854,985 

$50 15,200 

$100 6,600 

$500 2,880,000 

$1,000 5,319,000     $36,274,538 

$500     Legal     tender     between 

banks 365,000 

$1,000     Legal     tender     between 

banks 2,029,000 

$5,000     Legal     tender     between 

banks 77,695,000       80,089,000 


$116,363,538 

It  will  be  noted  that  $80,089,000  is  given  as 
"legal  tender  between  banks";  this  amount  consists 
of  special  notes  that  are  payable  only  to  chartered 
banks  in  Canada  and  used  by  them  as  before  stated. 

From  the  figures  given  above  it  will  be  seen  that 
$36,274,538  is  available  for  public  use,  but  the  banks' 
statements  to  the  government  at  the  same  date  shows 
that  the  holdings  of  Dominion  notes  by  the  banks 
amounted  to  $94,544,199,  or  $14,455,199  in  excess  of 
the  special  bank  legals,  which  leaves  the  amount  ac- 
tually in  the  hands  of  the  public  at  that  date  as  $21,- 
819,339. 

3.  Bank  note  issue. — By  the  Bank  Act,  Canadian 


5J<  BANKING  PRINCIPLES 

banks  are  empowered  to  issue  notes  of  $5  and  multi- 
ples thereof  up  to  the  amount  of  their  unimpaired 
paid-up  capital  against  the  general  security  of  their 
total  assets  on  which  the  notes  form  a  first  lien.  All 
the  banks  are  required  to  insure  the  circulation  of  their 
notes  at  par  in  every  part  of  Canada.  This  is  effected 
by  requiring  each  bank  to  provide  known  redemption 
agents  in  the  cities  of  chief  commercial  importance, 
namely,  Hahfax,  St.  John,  Charlottetown,  Montreal, 
Toronto,  Winnipeg,  Regina,  Calgary  and  Victoria. 
Every  bank  accepts  the  bills  of  every  other  bank  at 
par  and  forwards  them  to  the  nearest  branch  or  re- 
demption agent  of  the  bank  of  issue ;  hence  every  day 
all  over  Canada  the  banks  undergo  a  severe  test  of 
their  ability  to  redeem  their  circulation  no  matter  how 
freely  it  is  offered  for  redemption.  This  is  one  of  the 
strongest  advantages  of  the  system,  and  makes  the  cir- 
culation perfect  and  free  from  stagnation.  The  circu- 
lation thus  varies  in  velocity  and  volume  as  the  activity 
and  requirements  of  the  country  demand,  revealing  to 
tlie  experienced  banker  the  conditions  of  trade  and 
finance  thruout  the  country. 

It  is  important  to  remember  in  considering  the 
note  issue  that,  in  the  tills  of  its  own  bank,  a  note  has 
absolutely  no  value  except  as  so  much  stationery. 
This  enables  the  banks  to  carry  a  good  supply  of  bills 
at  each  branch,  as  they  do  not  become  a  liability  of 
the  bank  until  they  are  paid  over  the  counter.  This 
is  a  very  valuable  feature,  as  it  not  only  allows  a 
bank  to  keep  a  good  supply  of  till  money  on  hand 


NOTE  ISSUES  55 

without  loss,  but  it  enables  a  small  branch  to  meet  an 
usually  large  demand  for  cash  either  in  the  way  of 
repaying  a  heavy  deposit  or  of  making  a  large  loan. 

4.  Security  to  note  holder. — To  prevent  the  charg- 
ing of  discount  on  notes  in  case  of  suspension,  notes 
of  failed  banks  bear  interest  at  the  rate  of  five  per 
cent  per  annum  from  the  date  of  suspension  until  re- 
deemed either  by  the  liquidator  or  by  the  government, 
and  each  bank  is  obliged  to  keep  a  deposit  with  the 
government  for  this  purpose  equal  to  five  per  cent  of 
its  average  circulation.  This  is  called  the  Bank  Cir- 
culation Redemption  Fund,  and  should  it  ever  happen 
that  the  assets  of  a  failed  bank  are  insufficient  to  re- 
deem the  notes  outstanding  at  the  time  of  failure,  the 
entire  fund  is  liable  for  the  deficiency  and  the  other 
banks  have  to  bear  the  loss  pro  rata.  This  fund  was 
established  in  1890  at  the  suggestion  of  the  banks 
themselves. 

The  note  holder  is  amply  protected,  first,  by  the 
total  assets  of  the  bank ;  second,  by  the  double  liability 
of  the  shareholders;  and  third,  by  the  entire  redemp- 
tion fund.  The  amount  of  circulation  outstanding  at 
the  end  of  June,  1913,  was,  in  round  numbers,  $106,- 
000,000  for  the  whole  of  Canada,  and  to  meet  this  the 
banks  could  show  total  assets  of  $1,521,000,000  (in- 
cluding five  per  cent  redemption  fund,  $7,500,000), 
and  double  Habihty  $116,000,000,  or  nearly  $78  assets 
for  every  five-dollar  note  issued.  Then  also  penalties 
for  over-issue  are  extremely  heav5^ 

It  may  be  noted  that  only  three  banks  have  a  cir- 


56  BANKING  PRINCIPLES 

culation   that   much    exceeds   the   total   redemption 
fund. 

The  question  may  j^erhaps  be  raised,  why  should  all 
this  care  be  taken  to  protect  the  note  holder  against 
the  principal  creditor  of  the  bank,  the  depositor,  but 
it  must  be  recognized  that  there  is  an  essential  differ- 
ence between  a  note  holder  and  a  depositor,  the  former 
being  an  involuntary  creditor  and  the  latter  a  volun- 
tary one.     The  depositor  becomes  a  creditor  of  his 
own  free  will  and  for  his  own  benefit,  and  exercises 
his  own  choice  in  the  selection  of  a  bank.     The  holder 
of  a  note,  however,  receives  it  in  good  faith  in  payment 
for  labor  or  merchandise  and  should  be  fully  pro- 
tected.    A  note  issue,  to  fulfill  its  best  and  most  use- 
ful function,  must  be  absolutely  and  without  question 
as  good  as  gold.     One  of  the  strongest  elements  of 
security,  however,  is  the  fact  that  the  notes  are  sub- 
jected to  daily  redemption.     A  Canadian  bank  is  pro- 
hibited by  law  from  pledging  or  assigning  its  own 
notes,  consequently  the  only  way  it  is  able  to  put  them 
into  circulation  is  to  pay  them  out  over  the  counter. 
It  would  be  fatal  for  a  bank  to  issue  notes  except  with 
due  regard  to  its  ability  to  redeem  them.     It  is  seldom 
in  the  interest  of  any  bank  to  hold  or  pay  out  the  notes 
of  other  banks;  as  soon  as  a  bill  has  done  its  work  in 
the  hands  of  the  public  and  has  been  paid  into  another 
bank  it  is  promptly  presented  for  payment. 

5.  Elasticity. — The  most  admirable  feature  of  the 
note  issue  is  its  quality  of  elasticity.  In  every  coun- 
try, more  especially  every  new  country  where  the  ag- 


NOTE  ISSUES  57 

ricultural  interests  naturally  predominate,  the  alterna- 
tions of  the  seasons  and  the  succession  of  the  various 
agricultural  and  lumbering  products,  have  an  import- 
ant influence  on  the  currency  requirements  of  the  na- 
tion. In  Canada  the  machinery  of  the  circulation  sys- 
tem is  such  that  it  expands  and  contracts  automat- 
ically according  to  the  wants  of  the  country.  It  will 
expand  to  pay  for  the  making  of  butter  and  cheese, 
the  moving  of  the  crops,  and  for  lumbering  operations, 
but  when  it  has  performed  these  duties  it  will  contract 
silently  and  without  disturbing  the  money  market  or 
any  of  the  banks'  numerous  functions. 

Dunbar,  in  his  "Economic  Essays,"  thus  defines 
elasticity  in  currency: 

It  means  responsiveness  to  present  increase  or  diminution 
of  demand — the  power  of  adaptation  to  the  needs  of  the 
month,  the  week,  or  the  day,  whether  rising  or  falling.  .  .  . 
Elasticity  implies  the  operation  of  counter  forces,  in  a  cur- 
rency as  well  as  in  a  steel  spring.  That  a  currency  may  be 
responsive  to  demand,  it  is  necessary  that  the  forces  tending 
respectively  to  expand  or  to  restrict,  should  be  forces  at 
work  in  the  daily  business  of  the  bank,  where  it  is  brought 
into  contact  with  the  community  by  the  stream  of  loans,  de- 
posits and  payments. 

6.  Seasonal  fluctuations. — The  study  and  analysis 
of  the  monthly  circulation  returns  afford  much  inter- 
esting and  useful  information.  The  monthly  and  an- 
nual fluctuations  show,  year  by  year  and  season  by 
season,  every  change  and  pulsation  in  the  financial  life 
of  the  nation,  increasing  annually  in  volume  by  an  av- 
erage of  late  years  of  about  $8,000,000,  while  each 


58  BANKING  PRINCIPLES 

month,  tho  sharing  in  the  general  annual  increase, 
shows  a  rise  or  fall  corresponding  with  the  same 
months  of  previous  years.  The  tables  in  Figin*e  3 
are  compiled  from  the  government  returns  and  illus- 
trate that  fact  very  forcibly.  It  must  not  be  over- 
looked that  the  figures  given  do  not  show  either  the 
maximum  or  the  mininmm  amount  of  circulation  dur- 
ing the  respective  months,  but  simply  the  point  at 
which  the  issue  stood  at  the  eiui  of  each  month.  The 
maximum  amount  of  circulation  during  the  month 
is  given  in  the  government  statement,  but  the  figin*es 
at  the  end  of  the  month  are  generally  considered  as 
the  most  satisfactory  figures  to  deal  with. 

7.  Annual  changes. — Figui-e  3  shows  the  amount 
of  notes  in  circulation  at  the  end  of  each  month  from 
January,  1901,  to  January,  1913,  inclusive;  and  the 
average  circulation  in  millions  for  each  year  of  the 
twelve  years  is  as  follows : 

Circulation  Paid-up 

Average     Minimum  Maximum        Capital 

1901 50  45  Jan.    60  Nov.  67 

1902 56  49  —     68  Oct.  73 

1903 60  55  —     71  "  79 

1904 62  57  —     74  Nov.  80 

1905 64  58  —     79  —  85 

1906 71  61  —    86  Oct.  95 

1907 76  68  —     69  Nov.  96 

1908 71  67  —     86  —  96 

1909 74  m    —          92  —  97 

1910 82  73  —     99  —  100 

1911 90  77  —  112  —  108 

1912 100  88  —  120  Dec.  115 


NOTE  ISSUES  59 

An  examination  of  the  average  circulation  shows  a 
more  or  less  steady  annual  increase  from  $50,000,000 
in  1901  to  $100,000,000  in  1912,  and  there  is  only  one 
break  in  the  upward  tendency.  In  1907  the  average 
had  reached  $76,000,000,  but  in  1908  dropped  to  $71,- 
000,000,  a  loss  of  $.5,000,000,  which  was  not  fully  cov- 
ered even  in  1909  with  its  banner  crops,  the  average 
for  that  year  being  $74,000,000.  Any  departure 
from  the  normal  in  the  monthly  course  of  the  circula- 
tion can  be  traced  to  seasonal  or  temporary  reasons, 
which  do  not,  as  a  rule,  affect  the  year  as  a  whole, 
and  can  generally  be  ascribed  to  purely  Canadian 
causes ;  but  the  check  in  the  annual  increase  and  the  de- 
crease in  the  volume  of  the  circulation  tell  a  different 
and  more  serious  tale,  generally  that  of  unwise  specu- 
lation and  its  inevitable  finale.  At  all  events,  the 
reason  is  international  and  not  national  in  character 
and,  as  a  rule,  arises  out  of  the  financial  ills  of  our 
neighbor.  The  panic  of  1907  in  the  United  States 
and  the  consequent  depression  in  business  during  the 
following  years  seriously  affected  the  circulation,  and 
the  following  year,  1909,  shows  a  curtailment  of  all  ex- 
pansion and  enterprise  thruout  the  coimtry.  A  simi- 
lar condition  will  be  found  to  follow  aU  such  panics. 
A  reference  to  the  years  1892,  1893,  and  1894  shows 
the  average  circulation  for  these  years  as  $32,000,000, 
$34,000,000,  and  $31,000,000  respectively,  the  latter 
figin-es  showing  the  reaction  from  the  panic  of  1893. 

A  study  of  the  monthly  fluctuations  shows  that 
from  1868  to  1891  the  lowest  point  in  the  circulation. 


60  BANKING  PRINCIPLES 

was  generally  reached  about  the  middle  of  the  year  in- 
stead of  in  January,  which  is  now  the  lowest  month. 
About  1889  evidences  of  a  change  began  to  ap- 
pear, until  by  1895  the  readjustment  was  completed, 
and  January  became  the  largest  redemption  month, 
the  circulation  then  reached  its  lowest  point,  and  it 
has  held  that  position  ever  since.  Such  a  radical 
change  must  mark  an  epoch-making  event  in  the  his- 
tory of  the  Dominion,  and  this  was  no  less  an  occasion 
than  the  opening  up  of  the  gi-eat  Northwest  and  the 
entering  of  Canada  into  the  arena  of  the  world's 
^A'heat  growers. 

Previous  to  1906  the  circulation  returns  in  the  o^ov- 
ernment  statement  formed  a  very  reliable  barometer 
of  the  outstanding  circulation  in  the  hands  of  the  pub- 
lic, but  in  1907  the  banks  began  to  realize  that  the 
moving  of  the  crops  and  the  opening  up  of  the  North- 
west was  beginning  to  test  the  efficiency  and  volume 
of  the  available  circulation.  A  number  of  the  banks 
increased  their  capital.  For  the  requirements  of  the 
average  circulation  this  would  Iiave  sufficed  amply, 
but  it  was  impossible  to  increase  capital  at  a  suf- 
ficiently rapid  rate  to  cover  the  "soaring  peak"  of  the 
October  and  November  demand  for  currency.  In 
1908  an  amendment  to  the  Bank  Act  was  passed  per- 
mitting banks  to  issue  emergency  currency  during  the 
crop-moving  months,  based  on  a  percentage  of  their 
combined  capital  and  reserve.  This,  tho  useful, 
proved  of  only  temporary  and  limited  advantage. 
Another  expedient  was  tried  by  the  govermnent  in 


CIRCULATION  OF  CANADIAN  BANKS 

Yahuneln  MflQoxis.aa  repotted  in  the  Governmeat  Statemenf  at  the 

^nd  of  Each  Month. 

1901-1913 


Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Capital 

1901 

45 

46 

48 

47 

46 

49 

49 

51 

56 

58 

58 

54 

67 

1902 

49 

50 

52 

51 

51 

54 

52 

55 

61 

66 

65 

61 

73 

1903 

55 

56 

58 

56 

57 

59 

58 

60 

64 

71 

67 

63 

79 

19W 

57 

58 

60 

59 

58 

60 

60 

60 

64 

72 

69 

65 

80 

1905 

58 

59 

59 

60 

58 

62 

61 

62 

70 

77 

73 

70 

85 

a906 

61 

62 

66 

67 

64 

69 

68 

70 

77 

84 

81 

78 

95 

1907 

68 

71 

76 

73 

71 

76 

73 

77 

79 

84 

84 

78 

96 

1908 

67 

69 

69 

67 

68 

68 

67 

70 

76 

83 

80 

73 

96 

1909 

66 

67 

69 

67 

69 

70 

71 

72 

79 

90 

86 

81 

97 

•1910 

73 

75 

78 

79 

77 

80 

81 

81 

87 

96 

90 

88 

100 

1911 

77 

80 

82 

84 

82 

89 

89 

91 

97 

106 

102 

102 

108 

.1912 

88 

89 

96 

95 

94 

102 

96 

102 

104 

111 

116 

110 

115 

1913 

95 

97 

102 

98 

103 

106 

99 

106 

111 

118 

119 

118 

Difference  in  Millions  over  Previous  Month.  1901-1913 
Decrease  shown  thus:-2  (minus  two) 


Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Not. 

Dec. 

1901 

1 

2 

—  1 

—1 

3 

0 

2 

5 

2 

0 

— 4 

,1902 

—  5 

1 

2 

—  1 

0 

3 

-2 

3 

6 

5 

—  1 

—  4 

1903 

—  5 

1 

2 

—  2 

1 

2 

—  1 

2 

4 

7 

—  4 

—  4 

'1904 

—  6 

1 

2 

-1 

-1 

2 

0 

0 

4 

8 

—  3 

—  3 

1905 

7 

1 

0 

1 

—2 

4 

—  1 

1 

8 

7 

—4 

—3 

1906 

—  9 

1 

4 

1 

—3 

5 

-1 

2 

7 

7 

-3 

—  3 

1907 

—  10 

3 

5 

—  3 

— 2 

5 

—  3 

4 

2 

5 

0 

—  6 

1908 

—11 

2 

0 

—  2 

1 

0 

1 

3 

6 

7 

—  3 

—  7 

1909 

—  -7 

1 

2 

—2 

—2 

1 

1 

1 

7 

11 

—  4 

— 5 

1910 

—  8 

2 

3 

1 

-2 

3 

1 

0 

6 

9 

—  6 

O 

1911 

—  11 

3 

2 

2 

—2 

7 

0 

2 

6 

9 

—  4 

0 

1912 

-14 

1 

7 

—  1 

—1 

8 

-G 

6 

2 

7 

5 

—  6 

1913 

—  15 

2 

5 

—  4 

5 

3 

-7 

7 

5 

7 

1 

- 

Figure  3 
61 


62  BANKING  PRINCIPLES 

permitting  banks  to  deposit  gold  with  the  Receiver- 
General  and  obtain  Dominion  notes  in  exchange. 
This  was  not  taken  advantage  of  to  any  great  extent, 
as  it  was  found  to  be  not  onlj^  slow  and  clumsy  in  oper- 
ation, but  lacked  the  essential  feature  of  elasticit5\ 
As  might  be  surmised,  during  the  past  few  years  the 
banks  have  frequently  found  themselves  uncomfort- 
ably near  the  limit  of  their  circulation,  and  at  these 
times  they  do  not  present  the  notes  of  other  banks  for 
redemption  in  the  usual  way,  but  retain  them  for  their 
own  use  over  the  counter.  For  instance,  in  June, 
1912,  the  banks  evidently  held  each  other's  notes  until 
the  June  demand  was  satisfied,  and  in  consequence 
the  July  redemption  was  abnormally  large.  In 
studjdng  the  circulation  returns  for  the  years  1908  to 
1912  these  peculiar  conditions,  and  the  expedients  re- 
sorted to  for  supplying  the  extra  circulation  required, 
must  be  taken  into  account. 

8.  Monthly  changes. — Figure  3  shows  the  differ- 
ence month  by  month,  six  months  of  redemption  and 
six  months  of  issue.  The  months  arrange  themselves 
naturally  into  three  groups,  as  follows : 

Months  of  Issue  Months  of  Redemption 

February.  April. 

March.  May. 


June.  July. 


August.  November    (4th  week). 


NOTE  ISSUES  63 

Months  of  Issue  Months  of  Redemption 

September.  December. 

October.  January. 

November     (3  weeks). 

The  circulation  year  commences  with  the  month  of 
February,  which  shows  a  shght  output  varying  in 
amount,  and  due  principally  to  the  requirements  of 
the  lumbering  industry.  March  again  calls  for  an  in- 
creased issue,  as  in  this  month  the  lumbering  camps  are 
paid  off,  and  only  sufficient  men  for  the  drives  are  re- 
tained. In  April  and  ]May  most  of  the  March  circu- 
lation is  redeemed,  as  the  lumbermen  return  from  the 
woods  and  pay  their  family  bills  for  the  winter  at  the 
village  stores,  or  otherwise  spend  their  winter's  pay. 
June,  especially  during  the  last  three  or  four  years, 
has  shown  a  very  considerable  rise  in  circulation ;  then 
navigation  opens,  the  large  lumber  drives  are  com- 
pleted and  the  men  paid  off.  Payments  for  dairy 
products  increase  in  amount  and  general  activity  pre- 
vails thruout  the  country.  July  is  a  redemption 
month,  and  generally  shows  a  considerable  falling  off; 
factories  are  closed  down  for  repairs  and  stock  taking, 
and  the  steady  circulation  of  factory  pay-day  asserts 
itself  by  its  absence.  In  addition  to  this  the  summer 
exodus  to  the  seaside  and  to  Europe  begins  with 
the  consequent  purchase  of  traveling  fmids.  August 
is  the  first  of  the  three  great  months  of  issue.  But- 
ter, cheese,  and  hay,  with  vegetables  and  all  manner  of 
fruit  for  cannery  and  table  use,  call  largely  for  cur- 


64.  BANKING  PRINCIPLES 

rency,  and  with  increased  momentum  join  forces  with 
the  cereals  in  September  and  October  until  the  highest 
point  of  the  circulation  is  reached,  usually  in  the  third 
week  of  November.  Toward  the  end  of  November 
the  steady  return  of  the  circulation  begins  and  con- 
tinues all  thru  December  and  January. 

It  is,  of  course,  impossible  to  detail  all  the  influences 
which  affect  circulation,  but  the  above  covers  the  more 
important  points. 

A  late  winter  or  spring,  for  instance,  will,  of  course, 
affect  the  figures  for  the  spring  months  slightly,  and 
those  for  the  fall  may  be  influenced  by  the  lateness  of 
the  crops  or  by  the  holding  of  their  produce  by  the 
farmers  in  the  hope  of  better  prices,  but  these  changes 
are  all  adjusted  within  six  months,  the  year's  average 
is  not  affected,  and  the  fluctuations,  tho  delayed,  take 
place  as  usual. 

9.  Emergency  currency. — The  provision  for  a  spe- 
cial issue  during  the  crop-moving  period,  tho  limited 
in  operation,  was  found  sufficiently  useful  to  be  incor- 
porated in  the  Act  of  1913.  It  provides  that  during 
the  crop-moving  period,  from  the  first  of  September 
to  the  end  of  February,  banks  are  at  liberty  to  increase 
their  note  circulation  to  the  extent  of  1 5  per  cent  of  the 
combined  total  of  their  paid-up  capital  and  reserves. 
A  bank,  for  instance,  with  a  paid-up  capital  of  $10,- 
000,000  and  a  reserve  of  $5,000,000  would,  of  course, 
at  all  times  be  able  to  issue  notes  up  to  $10,000,000, 
but  during  the  period  from  September  1  to  February 
28  it  can  make  a  further  issue  of  15  per  cent  of 


NOTE  ISSUES  65 

$15,000,000,  namely,  $2,250,000,  excess,  or  a  total  of 
$12,250,000.  As  this  excess  issue  is  subject  to  a  gov- 
ernment tax  of  five  per  cent,  its  use  entails  a  loss  to 
the  bank,  and  consequently  it  is  used  only  when  abso- 
lutely necessary. 

In  August,  1914,  this  privilege  was  extended  thru- 
out  the  whole  year,  during  the  continuation  of  the  war. 

10.  Central  gold  reserves. — For  some  time  it  had 
been  felt  that  the  emergency  currency  and  other  ex- 
pedients were  only  tentative  measures,  and  that  in  the 
revision  of  the  Bank  Act  a  satisfactory  solution  of  the 
difficulty  would  be  found.  The  central  gold  reserve 
furnishes  a  solution  of  the  difficulty,  and  is  a  consistent 
amplification  of  the  note-issue  system,  which  has  so 
completely  met  the  requirements  of  the  country  dur- 
ing the  last  fifty  years. 

The  central  gold  resen^e  is  an  ingenious  plan 
whereby  the  banks  are  enabled  to  issue  bills  to  an 
unlimited  amount  without  departing  from  the  well- 
established  principles  of  an  asset  currency  limited  to 
the  amount  of  paid-up  capital.  The  notes  issued 
under  this  plan  possess  all  the  desirable  features  of 
elasticity  and  convertibility  in  common  with  the  ord- 
inary issue.  As  a  matter  of  fact,  there  is  only  one  is- 
sue, and  the  central  gold  reserves  come  automatically 
into  operation  as  soon  as  the  circulation  issued  by  a 
bank  exceeds  its  authorized  amount,  and  are  immedi- 
ately released  by  the  retirement  of  the  excess  in  the 
ordinary  course  of  redemption. 

The  machinery  is  simple.     Under  the  new  law  four 

XVI— 6 


66  BANKING  PRINCIPLES 

trustees  are  appointed — three  by  the  banks  and  one  by 
the  Minister  of  Finance — and  the  banks  are  empow- 
ered to  deposit  with  these  trustees  as  much  of  their 
gold  as  they  Hke.  This  deposit  is  called  the  central 
gold  reserves.  The  banks  are  then  permitted  to  is- 
sue against  the  reserves  their  notes,  dollar  for  dollar, 
as  and  when  required. 

Thus,  as  has  already  been  said,  a  bank  with  $10,- 
000,000  paid-up  capital,  $,5,000,000  reserve,  and  $15,- 
000,000  of  gold  and  Dominion  notes  (which  are  really 
receipts  for  gold),  would  at  all  times  be  able  to  issue 
up  to  $10,000,000,  and  during  the  emergency  period 
( September  1  to  February  28)  would  be  enabled  to  in- 
crease its  circulation  to  $12,250,000.  This  bank 
would  in  all  probability  deposit  with  the  central  gold 
reserves,  say,  $5,000,000  in  gold  or  Dominion  notes. 
It  would  then  be  at  liberty  to  allow  its  circulation  to 
run  up  to  $15,000,000  at  any  time,  or  to  $17,250,000 
during  the  emergency  period,  and  it  could  issue  a  still 
larger  amount  of  notes  by  making  a  further  deposit 
with  the  central  gold  reserves. 

Under  previous  acts,  Canadian  bank  notes  have 
proved  themselves  to  be  as  good  as  gold;  and  the  ex- 
cess circulation  protected  by  the  central  gold  reserves 
will  be  equally  as  good,  irrespective  of  amount.  The 
system  of  issue  and  redemption  thru  the  branches 
could  not  be  improved  upon.  A  note  issue  which  has 
absolute  security,  rapid  convertibility,  and  unlimited 
elasticity  must  surely  come  as  near  perfection  as  it  is 
possible  to  reach. 


NOTE  ISSUES  67 

11.  Lost  and  destroyed  notes. — There  is  a  very  ex- 
aggerated idea  in  the  mind  of  the  pubHc  as  to  the 
amount  of  notes  that  are  lost  or  destroyed,  and  never 
presented  to  the  banks  for  redemption. 

So  far  as  the  banks  themselves  are  concerned,  the 
amount  is  immaterial ;  they  cannot  profit  by  it  in  any 
way,  except  in  so  far  as  the  notes  form  part  of  their 
general  outstanding  circulation.  In  case  of  the  fail- 
ure of  a  bank,  the  liquidator,  at  the  end  of  three  years, 
pays  to  the  government  an  amount  sufficient  to  re- 
deem all  outstanding  notes;  in  this  way  the  govern- 
ment eventually  gets  the  benefit  of  any  notes  not  pre- 
sented for  redemption. 

Very  few  people  can  give  instances  within  their  per- 
sonal knowledge  of  notes  destroyed  beyond  recovery, 
either  by  fire  or  other  agencies.  When  such  accidents 
do  occvn-  the  banks  always  stand  prepared  to  consider 
a  refund  of  the  amount  lost,  provided  satisfactory  affi- 
davits and  bonds  are  submitted. 

No  bank  is  able  to  give  any  figures  as  to  the  amount 
of  destroyed  notes  represented  in  its  circulation ;  notes 
issued  forty  or  fifty  years  ago  are  still  being  presented 
for  payment. 

A  study  of  the  course  of  redemption  of  the  Sover- 
eign Bank  circulation  is  interesting.  This  bank  failed 
at  the  beginning  of  1908  with  an  outstanding  circula- 
tion of  $1,988,585;  at  the  end  of  six  years  (January 
1,  1914)  there  remained  $23,520  unredeemed  or  only 
1.18  per  cent  of  the  amount  outstanding  on  January 
1,  1908.     On  January  1,  1917,  this  amount  had  been 


68  BANKING  PRINCIPLES 

further  reduced  to  $15,270  or  .61  per  cent.  During 
1916  redemption  averaged  over  $100  monthly. 
The  outstanding  balance  consists  entirely  of  fives 
and  tens,  all  larger  denominations  having  been  re- 
deemed. 

12.  Branch  system. — Practically  every  country  in 
the  world  except  the  United  States  has  recognized  the 
utility,  if  not  the  absolute  necessity,  of  the  branch  sys- 
tem of  banking  in  handling  commodities  as  liquid  as 
money  or  credit.  A  bank  system  without  branches  is 
on  a  par  with  a  city  without  waterworks  or  a  country 
without  a  railroad  so  far  as  an  equable  distribution  of 
credit  is  concerned. 

In  October,  1916,  there  were  in  Canada  twenty-two 
banks,  with  head  offices  situated  principally  in  Mont- 
real and  Toronto,  controlling  3,296  branches  of 
which  3,190  are  situated  in  Canada,  twenty-five  in 
Newfoundland  and  eighty-one  elsewhere,  chiefly  in 
the  West  Indies.  Some  of  these  banks  have  over 
three  hundred  branches  scattered  thruout  the  Do- 
minion, receiving  money  in  Vancouver  today  and 
lending  it  in  Halifax  to-morrow,  or  the  reverse;  and 
ceaselessly  working  to  remove  money  from  where  it 
is  least  needed  to  where  it  is  most  needed.  With  a 
branch  system  money  always  finds  its  own  level.  A 
merchant  in  the  West  pays  no  more  for  his  banking 
accommodation  than  his  confrere  of  equal  standing  in 
the  East.  The  immense  territory  covered  by  Canada 
alone  makes  branch  banking  an  absolute  necessity  for 
the  economic  and  efficient  distribution  of  loanable  cap- 


NOTE  ISSUES  69 

ital  and  banking  facilities.  Anj^  other  method  would 
be  cumbersome  and  wasteful. 

Under  the  Bank  Act  banks  are  permitted  to  "open 
branches,  agencies,  and  offices."  No  restriction  is 
placed  by  the  govermiient  on  the  number  or  situation 
of  the  branches  to  be  opened  by  any  bank,  and  to  this 
absence  of  red  tape  may  be  ascribed  in  great  measure 
the  successful  working  of  the  system  in  Canada. 

As  a  practical  illustration  of  the  work  accomplished 
by  the  branches  in  distributing  wealth,  let  us  take  two 
towns — it  is  immaterial  whether  they  are  ten  miles  or 
three  thousand  miles  apart.  A  is  a  comparatively 
wealthy  town,  with  a  population  composed  in  gTcat 
part  of  retired  merchants  and  farmers,  with  practi- 
cally no  industries  and  with  little  or  no  enterprise. 
Its  deposits  are  large  with  no  demand  or  outlet  for 
money  in  the  town.  B,  on  the  other  hand,  is  a  busy 
little  manufacturing  town  with  all  its  money  invested 
in  its  constantly  increasing  industries,  and  the  branch 
here  receives  but  meager  deposits  to  meet  the  heaw 
demands  for  advances.  Now  this  is  where  the  branch 
system  steps  in  and  enables  the  B  branch  to  use  the 
surplus  funds  of  A,  thus  supplying  the  legitimate  re- 
quirements of  B's  customers,  to  the  profit  of  the  bank 
and  the  benefit  of  the  town.  When  it  is  remembered 
that  this  principle  is  working  every  day  in  hundreds 
of  branches  thruout  Canada  in  towns  and  villages 
ten,  one  hundred  or  one  thousand  miles  apart,  and 
yet  just  as  intimately  interdependent  of  each  other  as 
in  the  above  instance,  the  benefit  and  economy  of  the 


70  BANKING  PRINCIPLES 

branch  system  will  be  realized.  From  this  it  will  be 
seen  that  no  matter  how  small  the  deposits  are  in  a 
branch,  its  loanable  funds  are  limited  only  by  the 
available  resources  of  the  bank  of  which  it  forms  an 
integral  part.  A  branch  till  is  like  the  widow's  cruse 
of  oil;  it  can  never  be  emptied  nor  yet,  on  the  other 
hand,  can  it  be  made  to  overflow. 

A  consideration  of  the  great  area  over  which  the 
branches  of  Canada  are  spread  and  the  variety  of  in- 
terests to  which  they  minister,  impresses  one  with  the 
fact  that  Canadian  banks  are  not  local  in  character, 
and  that  their  interest  and  their  activity  are  not 
bounded  by  the  confines  of  any  one  town  or  province, 
or  even  by  the  Dominion  itself. 

13.  Branch  system  and  circulation. — The  branch 
system  and  the  note  issues  are  the  two  principal  fac- 
tors which  have  enabled  the  banks  to  assist  so  ma- 
terially in  the  expansion  and  upbuilding  of  Canada. 
They  are  so  closely  connected  and  interdependent 
that  it  is  necessary  to  consider  them  together.  With- 
out branches  the  circulation  would  lack  in  a  great 
measure  the  elasticity-  of  issue  and  redemption  which 
is  its  most  useful  and  characteristic  feature.  With- 
out the  circulation  privilege  it  would  be  impossible  for 
the  banks  to  open  branches  in  new  and  sparsely  popu- 
lated districts. 

It  is  well  known  that  the  average  branch  is  run  at 
a  loss  for  the  first  three  or  four  years,  and  bearing 
this  in  mind  a  consideration  of  the  large  number  of 
branches  opened  yearly  by  the  banks,  must  lead  to 


NOTE  ISSUES  71 

the  conclusion  that  many  hanks  are  devoting  at  least 
the  whole  of  their  profits  on  circulation  to  the  opening 
of  branches  and  the  development  of  new  districts. 
An  average  of  three  or  four  new  branches  opened 
yearly  might  easily  absorb  the  profit  on  $1,000,000 
circulation,  especially  in  the  West,  where  the  initial 
and  the  operating  expenses  are  high. 

With  the  exception  of  Scotland,  where  branch 
banking  has  been  brought  to  a  gi*eat  degree  of  per- 
fection, Canada  shows  a  larger  number  of  branches 
in  proportion  to  population  than  any  other  country 
in  the  world,  as  the  following  figui-es  will  show: 

At  End  of  1912 

Scotland     one  bank  to  every  2,106  people 

Canada one  bank  to  every  2,847  people 

United  Kingdom.  .  .one  bank  to  every  5,116  people 

England    one  bank  to  every  5,422  people 

United  States    ....  one  bank  to  every  3,407  people 

As  regards  cities,  Bristol,  England,  for  example, 
has  one  bank  for  every  5,674  people,  while  Toronto, 
a  city  of  similar  size,  has  one  bank  for  every  2,354 
people.  Cincinnati,  in  the  United  States,  has  one 
bank  to  every  9,120  people.  Taking  Canadian  cities 
as  a  whole,  there  is  one  bank  to  every  3,100  people, 
while  the  United  States  can  show  only  one  bank  for 
9,700.  It  will  be  seen  from  this  that  Canadian  banks 
have  given  a  good  account  of  their  stewardship  so  far 
as  supplying  banking  facilities  to  the  country  is  con- 
cerned. Without  asset  currency,  however,  such  ex- 
pansion would  have  been  impossible. 


72  BANKING  PRINCIPLES 

14.  Branch  system  and  the  borrower. — The  eco- 
nomical and  equable  distribution  of  loanable  funds 
made  possible  by  the  branch  system  has  already  been 
referred  to.  The  control  of  these  funds  and  the  abil- 
ity to  direct  them  to  different  parts  of  the  country, 
according  to  the  demands  of  trade  and  agriculture, 
has  enabled  the  banks  to  accomplish  astonishing  re- 
sults with  the  means  at  their  disposal.  The  banks,  as 
a  whole,  form  a  vast  clearing  house  not  only  between 
the  depositor  and  the  borrower,  but  also  between  bor- 
rower and  borrower.  A  little  consideration  shows 
that  the  latter  is  an  important  factor  in  the  financial 
life  of  a  country  so  extensive  as  Canada.  The  banks 
are  continually  lending  to  Peter  to  pay  Paul,  altho 
these  two  gentlemen  may  be  quite  unconscious  of  the 
relation  and  have  probably  never  even  heard  of  each 
other. 

There  is  practically  little  or  no  fluctuation  in  the 
total  amount  of  commercial  loans,  only  a  steady  in- 
crease due  to  the  gi'owth  of  the  countrj'-,  the  demand 
for  the  loanable  capital  at  the  disposal  of  the  banks 
generally  being  in  excess  of  the  supply.  In  the  gov- 
ernment statement  of  July,  1913,  commercial  loans 
were  reported  at  a  trifle  under  $902,000,000,  as 
against  $899,000,000  in  the  preceding  month  and 
$852,000,000  in  July,  1912,  yet  in  the  face  of  this 
constant  increase,  banks  are  accused  of  restricting 
their  loans  unduly.  It  is  ti'ue  they  restrict  unwise 
expansion  in  times  of  financial  stress,  and  are  always 
foresighted  in  preparing  the  country  for  troublesome 


NOTE  ISSUES  73 

times,  but  this  action  is  of  inestimable  benefit  to  the 
country.  Even  under  the  serious  conditions  whicii 
prevailed  in  1893,  1907,  and  1913,  regular  customers 
were  not  restricted  in  the  use  of  their  authorized  lines 
of  credit  or  reasonable  renewals  thereof.  The  banks 
did  refuse  to  make  advances  for  projects  outside  or- 
dinary business  requirements,  such,  for  instance,  as 
an  unusually  heavy  purchase  of  raw  material,  not 
for  the  immediate  needs  of  the  business,  but  simply 
available  at  a  bargain.  New  accounts  at  such  a  time 
are  not  encouraged,  and  all  ventures  other  than  those 
devoted  to  the  creation  and  distribution  of  products 
are  consistently  refused  assistance. 

A  study  of  the  bank  returns  for  the  period  referred 
to  will  show  how  the  banks  use  every  means  to  meet 
the  needs  of  their  regular  customers.  In  1893,  for  in- 
stance, current  loans  increased  by  over  $11,000,000 
between  January  and  June  with  an  increase  of  barely 
$1,000,000  in  deposits.  The  banks  felt  that  they 
were  under  a  moral  obligation  to  take  care  of  their 
customers  to  the  extent  of  their  current  lines  of  credit, 
and  provided  these  funds  by  reducing  their  foreign 
balances  just  at  the  time  when  they  could  have  been 
used  at  a  profit,  yet  the  Canadian  customers  were 
asked  to  pay  no  more  than  the  usual  rate  of  six  or 
seven  per  cent.^ 

The  slow  and  apparently  placid  increase  of  the 
loans,  as  shown  by  the  monthly  statements,  is  decep- 
tive, for  beneath  the  surface  lies  a  seething  mass  of 

1  See  call  loans  in  New  York,  page  103. 


74  BANKING  PRINCIPLES 

activity,  inexti-icably  interwoven.  The  continued  ex- 
istence of  each  kind  of  advance  depends  in  great 
measiu-e  on  the  constant  mobihty  of  every  other.  Re- 
payments of  advances  made  by  one  class  of  industry 
are  received  in  time  to  be  loaned  to  an  entirely  differ- 
ent business,  possibly  at  the  other  end  of  the  country, 
and  so  on.  If  lumber  becomes  unsalable  from  over- 
production or  other  causes,  the  advances  made  for 
lumbering  ox^erations  would  not  be  liquidated  in  sea- 
son, and  the  banks  might  find  it  difficult  to  satisf}^ 
the  requirements  of  other  industi'ies,  which  generally 
make  use  of  these  fxmds  as  they  are  returned. 

This  will  indicate  how  necessarj^  it  is  for  the  banks 
to  observe  at  all  times  one  of  the  most  important  rules 
of  sound  banking,  namely,  that  every  loan  made  by  a 
bank  should  rest  on  a  foundation  of  salable  merchan- 
dise or  collectible  debts.  It  is  for  this  reason  that 
loans  on  real  estate  have  no  place  on  the  books  of  a 
commercial  bank,  whose  profit  and  existence  are  de- 
pendent on  the  frequency  of  this  "turn  over,"  and  the 
keen  interest  which  bankers  take  in  preventing  over- 
production in  any  line  is  thus  justified.  The  average 
customer  gauges  his  output  from  local  or  provincial 
experience,  the  banker  from  a  national  and  interna- 
tional standpoint. 

A  concrete  example  may  be  of  value  in  illustrating 
the  circulation  of  credit  attained  thru  the  branch  sys- 
tem. Take,  for  instance,  a  western  farmer  who  bor- 
rows money  from  a  bank  in  the  beginning  of  the  year 
in  order  to  pay  for  seed  and  labor,  and  about  the  same 


NOTE  ISSUES  75 

time  becomes  indebted  to  the  local  store  for  supplies 
and  the  like.  When  he  harvests  his  crop,  in  the  or- 
dinary course,  he  sells  it  to  a  grain  buyer,  who  pays 
him  by  a  check  or  order  on  the  bank.  This  money  is 
used  by  the  farmer  to  discharge  his  debt  to  the  bank 
and  to  the  store;  the  balance,  if  he  is  a  thrifty  man, 
he  deposits.  The  storekeeper  remits  his  receipts 
from  such  payments  to  the  wholesale  houses  in  the 
East,  and  the  wholesaler  liquidates  his  indebtedness 
to  his  bank  or  to  the  manufacturer;  the  latter  in 
turn  pays  his  bank  and  buys  more  raw  material.  This 
is  an  instance  of  only  one  class  of  loan,  but  it  will  give 
some  idea  of  the  fluidity  and  interchangeability  of 
credit  which  is  possible  thru  the  branch  system.  It 
might  further  be  pointed  out  that  the  aggregate  liqui- 
dation of  loans  by  the  farmers  and  correlative  debtors 
enables  the  banks  to  finance  the  crops  by  making  ad- 
vances against  warehouse  receipts,  etc.,  which  are  ul- 
timately liquidated  by  drafts  with  bills  of  lading  at- 
tached. This  financial  operation  provides  the  basis 
for  foreign  exchange  with  which  to  pay  for  the  raw 
material  and  other  imports  of  the  manufacturer  and 
wholesaler.  It  is  impossible  fully  to  appreciate  the 
far-reaching  effect  of  even  this  simple  payment  of  a 
farmer's  debt.  The  discharge  in  any  part  of  Can- 
ada of  a  debt  of  no  matter  what  nature  or  size,  is  likely 
to  be  equally  dynamic  in  its  influence  on  the  huge  tho 
sensitive  volume  of  loans. 

15.  Establishing  a  line  of  credit. — There  are  cer- 
tain conditions   covering  the   relation  of   Canadian 


76  BANKING  PRINCIPLES 

banks  with  their  borrowers  which  are  invariably  ob- 
served. One  is,  that  no  man  can  be  a  borrower  from 
more  than  one  bank,  and  it  is  only  in  the  case  of  a 
very  large  account  that  this  rule  is  broken,  and  then 
only  by  mutual  agreement  between  the  banks  inter- 
ested. The  advantage  of  this  "one  bank"  policy  is 
obvious.  The  customer  benefits  from  the  fact  that 
in  being  loyal  to  one  bank  he  can  rely  upon  the  sup- 
port of  that  bank  at  all  times.  The  bank  is  also 
thoroly  in  touch  with  his  position  and  prospects,  and 
is  often  able  to  give  valuable  advice.  Another  con- 
dition a  Canadian  bank  insists  on  is,  that  a  full  state- 
ment of  a  customer's  affairs  should  be  submitted  to  it 
each  year,  and  that  as  far  as  possible  loans  should  be 
cleaned  up  at  least  once  a  year. 

On  the  fulfilment  of  these  conditions  the  bank  on 
its  part  grants  a  customer  what  is  called  a  line  of 
credit,  based  on  his  estimated  requirements,  which  is 
generally  for  a  period  of  one  year,  during  which  time 
the  customer  is  able  to  use  as  much  or  as  little  of  the 
authorized  credit  as  his  business  requires;  providing, 
however,  that  he  does  not  exceed  the  limit.  A  cus- 
tomer of  a  Canadian  bank  of  good  standing  has  there- 
fore very  little  to  worry  about  during  the  cm'rency 
of  his  line  of  credit.  He  is  not  called  upon  to  pay  in- 
terest on  more  money  than  he  is  actually  using,  and 
he  is,  moreover,  assured  of  the  support  of  the  bank  in 
the  operation  of  his  legitimate  business,  no  matter 
what  the  financial  conditions  may  be. 

The  position  of  a  bank  customer  in  the  United 


NOTE  ISSUES  77 

States  is  very  different  and  not  always  so  comforta- 
ble, ^^ational  banks  are  restricted  by  law  in  the 
amount  of  loans  they  may  make  to  any  one  firm  or 
corporation,  and  large  concerns  are  forced  to  seek 
loans  all  over  the  country.  This  practice  is  not  to 
the  advantage  of  the  borrower;  he  is  dependent  on 
note  brokers  to  dispose  of  his  paper  to  various  pur- 
chasers thruout  the  United  States,  to  whom  he  is 
personally  unknown.  The  paper  must  be  met  at  ma- 
turity without  fail.  True,  provision  could  be  made 
b}''  selling  more  paper,  but  if  money  is  at  all  scarce 
even  this  resource  is  not  available  and,  in  consequence, 
solvent  firms  are  often  forced  to  the  wall.  The  po- 
sition is  an  unfortunate  one  for  the  borrower,  not 
only  because  his  finances  are  always  in  a  state  of  un- 
certainty, but  because  the  practice  has  a  tendency 
to  encourage  over-borrowing  in  times  of  easy  money, 
with  consequent  over-expansion.  This  evil  is  un- 
likely to  happen  to  a  man  who  has  only  one  bank  to 
deal  with,  as  no  trained  banker  would  allow  a  cus- 
tomer to  obtain  more  money  from  the  bank  than  his 
business  conditions  warranted.  A  brake  is  just  as 
necessary  in  business  life  for  averting  disaster,  as  it  is 
in  the  mechanical  world. 

This  method  of  financing  naturally  restricts  the 
manufacturer  and  wholesale  merchant  to  the  making 
of  one  class  of  paper,  their  own  single  name  notes, 
and  consequently  comparatively  few  settlements  with 
their  customers  are  affected  by  means  of  notes  or 
drafts,  the  amounts  due  being  carried  in  open  account 


78  BANKING  PRINCIPLES 

until  the  customer  remits  according  to  the  terms  of 
the  sale. 

In  Canada,  however,  open  accounts  are  the  excep- 
tion, and  practically  every  sale  of  goods  is  subject  to 
settlement  by  draft  or  note.  These  notes  and  drafts 
are  known  as  trade  bills  and  are  discounted  freely  by 
a  bank  and  collected  thru  its  various  branches,  the 
proceeds  being  applied  in  reduction  of  the  customer's 
loans. 

The  Canadian  borrower  has  therefore  two  methods 
of  borrowing,  loans  and  trade  paper.  Loans  are 
made  with  or  without  securitj^  for  the  purpose  of  cre- 
ating or  purchasing  goods.  The  goods  when  made 
or  acquired  are  exchanged  for  cash,  notes  or  the  right 
to  draw  on  the  purchaser ;  the  two  latter  are  known  as 
trade  bills  and,  when  discounted  by  a  reputable  firm, 
form  the  highest  class  of  security  a  bank  can  have. 

The  discounting  of  trade  paper  is  of  benefit  both 
to  the  bank  and  to  the  borrower.  The  latter  changes 
a  direct  loan  into  an  indirect  or  contingent  liability, 
and  is  assured  of  the  effective  and  prompt  collection 
of  the  debt.  The  bank  receives  tangible  evidence  that 
its  loan  has  been  devoted  to  the  production  of  goods, 
and  that  the  goods  have  been  disposed  of  to  responsi- 
ble merchants;  furthermore,  its  position  is  strength- 
ened b}^  a  second  name  and  a  definite  date  of  pay- 
ment. 

16.  Brandies  and  panics. — It  is  apparent  that  the 
branch  system  not  only  gathers  up  money  thruout 
the  country,  but  distributes  and  varies  the  risk  of  the 


NOTE  ISSUES  79 

bank's  investments.  It  does  more  than  this,  it  dis- 
tributes the  risk  of  the  deposits  which,  at  times,  is  a 
very  real  risk.  A  run  on  a  solvent  bank  is  always 
more  or  less  local  in  character  and,  tho  quite  capable 
of  wrecking  an  individual  bank,  would  not  seriously 
affect  the  standing  of  a  branch  banking  system.  Not 
only  would  the  head  office  be  able  to  send  ample  funds 
to  pay  off  every  deposit  if  necessary,  but  the  branch 
itself  would  be  in  a  position  to  allay  the  run  by  its 
abihty  to  pay  out  its  own  notes;  these  would  be 
taken  readily  by  the  depositors  and,  as  a  rule,  assist- 
ance from  the  head  office  would  not  be  required. 
Nothing  will  stop  a  run  of  this  kind  quicker  than  an 
apparent  willingness  and  ability  to  meet  all  demands. 
Frequently,  in  such  cases,  the  majority  of  the  de- 
posits are  returned  to  the  bank  if  it  is  willing  to  take 
them.  Depositors  who  can  be  stampeded  in  this 
manner  by  a  chance  word  or  rumor  are  not  desirable, 
and  the  refusal  to  reopen  a  few  of  these  accounts  has 
a  very  salutary  effect  on  a  community.  So  unrea- 
sonable are  panics  of  this  nature  that  people  have 
been  known  to  withdraw  money  from  a  small  city 
branch  and  deposit  it  in  the  main  office  of  the  same 
bank  further  down  the  street,  but  occupying  a  more 
pretentious  building.  Such  panics  as  these  are  dis- 
agreeable, but  do  not  seriously  affect  a  bank  as  a 
whole,  and  fortunately  thej'^  seldom  happen. 

Even  a  serious  loss  by  way  of  a  bad  loan  would  not 
affect  the  security  of  a  branch  depositor;  no  matter 
how  small  the  branch,  the  depositor  shares  in  the  gen- 


80  BANKING  PRINCIPLES 

eral  security  of  the  assets  of  the  whole  bank.  The 
failure  of  a  large  customer  might  easily  force  a  purely 
local  bank  to  close  its  doors,  but  under  the  branch 
system  the  loss  would  be  spread  over  the  earnings  of 
the  whole  system. 

Altho  the  keenest  competition  exists  among  the 
banks  in  obtaining  business  at  their  various  branches, 
and  little  or  no  intercourse  occurs  between  the  gen- 
eral managers  in  ordinarj^  times,  they  are,  as  trained 
bankers,  naturally  in  accord  in  interpreting  the  first 
signs  of  trouble  on  the  financial  horizon,  and  either 
in  their  several  annual  addresses  or  thini  the  press 
warn  the  public  to  retrench  and  prepare  for  the  storm. 
All  the  annual  reports  of  the  banks  issued  at  the  end 
of  1906  and  beginning  of  1907  contained,  in  the  ad- 
dresses of  the  several  general  managers,  serious  warn- 
ings of  troublesome  times  ahead,  which  unliappily 
materialized  in  October,  1907.  Banks  made  them- 
selves veiy  unpopular  in  the  early  part  of  1907  by 
their  insistence  on  retrenchment  in  all  lines  of  busi- 
ness activity,  but  their  wisdom  was  fully  justified  by 
the  result — Canada  rode  thru  the  storm  inconven- 
ienced but  unscathed. 

Should  a  sudden  emergency  ever  arise  a  few  hours 
would  suffice  to  bring  the  general  managers  of  the 
twenty-five  banks  to  Montreal  or  Toronto.  Their 
united  counsel  and  experience  would  go  far  to  ward 
off  the  anticipated  trouble.  In  a  few  hours,  if  nec- 
essary, every  branch  in  Canada  from  Dawson  City 
to  HaHfax  would  act  in  unison.     With  a  system  ca- 


NOTE  ISSUES  81 

pable  of  such  control  a  general  crisis  or  panic  would  be 
almost  impossible. 

Consider,  too,  the  personnel  of  the  general  mana- 
gers, who  are  men  trained  from  their  youth  up  in  their 
profession,  as  only  the  branch  system  can  train.  In 
their  early  years,  moving  from  branch  to  branch  thru- 
out  Canada,  they  became  thoroly  versed  in  local  cus- 
toms and  environments,  and  in  many  cases  they 
gained  experience  in  foreign  branches  in  England, 
the  United  States,  and  elsewhere.  As  accountants 
and  managers  of  large  city  branches  they  obtained  a 
broad  knowledge  of  national  trade  and  finance  until, 
as  general  managers,  they  are  found  not  only  direct- 
ing the  administration  of  their  nimierous  branches, 
but  also  digesting  and  interpreting  the  reports  of 
conditions  received  from  the  branches,  scattered  thru- 
out  the  length  and  breadth  of  Canada.  There  are 
few  things  connected  with  the  life  of  Canada  that  a 
banker  can  afford  to  leave  unstudied.  The  weekly 
reports  or  news  letters  received  from  the  branch  man- 
agers deal  with  every  variety  of  subject,  from  the 
price  of  staples  to  the  death  of  a  leading  citizen.  As 
a  result,  the  bankers  know  more  of  the  general  condi- 
tions of  Canada  as  a  whole  than  anyone  else.  It  has 
been  said  that  the  files  of  one  of  the  larger  banks 
contain  more  valuable  and  accm*ate  information  than 
can  'be  found  in  any  newspaper  office. 

17.  General  review. — A  study  of  the  Canadian 
banking  system  along  the  above  lines  will  demon- 
strate clearly  why  it  has  been  accorded  such  a  high 

XVI— 7 


82  BANKING  PRINCIPLES 

place  among  the  banking  systems  of  the  world,  not 
only  on  account  of  the  equable  distribution  of  loan- 
able funds  thru  the  branch  system,  but  also  on  account 
of  the  absolute  safety  of  the  note  issue  and  its  elastic- 
ity in  meeting  every  need  of  national  life  and  com- 
merce. The  uniform  reciprocal  payment  of  each 
other's  notes  at  par  by  the  banks  all  over  the  Domin- 
ion, followed  by  prompt  redemption,  renders  forced 
and  unhealthy  inflation  an  impossibility,  while  the 
automatic  expansion  of  tlie  circulation  whenever  re- 
quired or  called  for  by  the  exigencies  of  commerce 
and  agriculture  renders  it  peculiarly  adapted  to  the 
needs  of  a  young  and  growing  country  like  Canada. 

Dr.  Joseph  French  Johnson  sums  up  the  main  ad- 
vantages of  the  Canadian  system  of  branch  banking 
as  follows: 

1.  Large  capital  behind  each  institution.  No  matter  how 
small  the  branch  the  customers  share  in  the  security  which  a 
large  capital  offers. 

2.  Unity  of  policy  on  the  part  of  the  leading  banks  dur- 
ing a  stringency,  in  contrast  to  the  playing  at  cross  pur- 
poses which,  in  the  panic  of  1893,  distinguished  the  action  of 
the  national  banks  in  the  central  reserve  cities  of  the  United 
States  against  the  smaller  country  banks.  In  1907,  if  the 
country  banks  had  been  branches  of  the  large  city  banks, 
they  would  not  have  withdrawn  funds  from  those  banks  when 
they  were  so  badly  needed,  and  the  crisis  would  not  have  been 
so  severe. 

3.  Power  to  equip  every  branch  with  ample  reserves  for 
maintaining  commercial  credit  by  means  of  note  issues.  It 
is  impossible  in  Canada  for  the  business  needs  of  any  com- 
munity, no  matter  how  remote,  to  outstrip  the  banking  facili- 
ties,  as   is   often   the   case   with  us.     The  resources   of  the 


NOTE  ISSUES  83 

branch  bank  are  quickly  and  indefinitely  extended.  More- 
over, when  the  need  for  additional  facihties  has  passed,  the 
business  of  the  bank  can  contract  accordingly  without  loss 
to  anyone. 

4.  Uniformity  of  interest  rates  thruout  the  whole  coun- 
try which  do  not  vary  more  than  one  or  two  per  cent  be- 
tween the  large  cities  in  the  east  and  the  newer  towns  and 
rapidly  expanding  cities  of  the  west.  In  the  absence  of  com- 
petition the  necessity  of  depending  upon  small  local  banks 
for  accommodation  requires  the  business  men  of  western 
towns  in  the  United  States  to  pay  monopoly  rates  for  the 
use  of  capital. 

5.  Expert  supervision  by  the  central  office  prevents  bad 
banking.  The  boards  of  directors  of  the  large  banks  are 
responsible  for  all  the  branches  and  they  are  therefore  forced 
to  put  into  practice  a  method  of  examination  and  super- 
vision which  is  much  more  effective  than  government  exam- 
ination in  the  United  States. 

6.  Branches  can  be  maintained  in  localities  where  the 
profit  of  the  business  would  not  justify  the  establishment  of 
a  separate  bank  with  independent  capital.  The  city  banks 
can  establish  branches  without  any  investment  in  additional 
capital.  Branches  can  be  established  where  the  business  is 
so  small  as  to  justify'  simply  the  employment  of  a  few  clerks 
in  a  rented  office. 

18.  Canadian  hanking  system  under  war  condi- 
tions.— Since  the  outbreak  of  the  war  in  August,  1914, 
the  branch  system  of  banking  combined  with  an  asset 
currency  gave  another  proof  of  its  value  for  the 
equable  and  economic  distribution  of  loanable  funds 
thruout  a  vast  area,  under  adverse  conditions,  and 
with  the  least  possible  disturbance  of  business  or  dis- 
placement of  reserves. 

Elasticity  and  adaptability  to  new  conditions  have 
always  been  among  the  chief  characteristics  of  the  Ca- 


84  BANKING  PRINCIPLES 

nadian  banking  system  and  these  qualifications  could 
be  subjected  to  no  more  severe  test  than  when  Can- 
ada, as  a  belligerent  nation  found  herself  confronted 
bj^  the  complicated  and  innimierable  problems  raised 
by  war  conditions.  The  majority  of  these  problems 
at  the  outset  of  the  war  were  of  a  financial  and  fidu- 
ciary nature  and  the  government  naturally  looked  to 
the  banks  for  assistance  and  advice.  The  latter  were 
equal  to  the  occasion  and  exhibited  a  reserve  of  power 
and  a  capacity  for  overcoming  these  new  and  trying 
conditions,  from  their  ordinary  resources,  with  little 
or  no  recourse  to  the  remedial  measures  passed  by  the 
government. 

Altho  no  moratorium  was  declared  in  Canada,  the 
Dominion  Government,  more  as  a  matter  of  prepar- 
edness than  of  necessity,  made  bank  notes  equivalent 
to  gold  or  legal  tender,  extended  the  emergency  cur- 
rency privilege  thru  the  whole  year  (instead  of  the 
usual  period,  September  first  to  February  twenty- 
eighth)  and  made  provision  whereby  the  banks  could 
borrow  from  the  government  against  the  deposit  of 
approved  securities  or  commercial  paper.  As  stated 
above,  however,  the  banks  did  not  find  it  necessary  to 
use  any  of  these  privileges,  whose  real  value  rested  in 
their  moral  effect,  in  the  assurance  to  the  public  and 
to  the  banks  that  a  provision  had  been  made,  so  far  as 
lay  in  the  power  of  government,  to  enable  business  to 
go  on  as  usual. 

It  was  fortunate  for  Canada,  that  for  some  time 
prior  to  the  war,  the  banks  had  been  advising  re- 


NOTE  ISSUES  85 

trenchment  in  expenditure  and  discouraging  any  ten- 
dency on  the  part  of  their  customers  to  overexpand 
or  overproduce.  The  outbreak  of  war,  therefore, 
found  bank  loans  in  process  of  satisfactory  reduction 
and  no  untoward  pressure  on  the  part  of  the  banks 
was  necessary  to  continue  the  healthy  liquidation  then 
in  process,  the  public  being  more  than  ever  aware  of 
the  necessity  for  reduction  in  loans  and  retrenclmient 
generally.  Commercial  loans  in  Canada  decreased 
$156,000,000  between  June  30,  1914,  and  October  31, 
1916. 

For  the  year  preceding  the  war,  Canada  had  ad- 
verse international  trade  balances  of  nearly  $300,- 
000,000.  To-day  this  has  changed  to  a  favorable 
balance  which  will,  for  the  year  1916,  reach  at  least 
$500,000,000  and  probably  more.  The  total  foreign 
trade  has  nearly  doubled  during  the  same  period,  the 
estimate  for  1916  being  in  the  neighborhood  of  $2,- 
000,000,000.  Much  of  the  increase  in  the  exports  may 
be  ascribed  to  shipments  of  munitions  and  other  war 
materials,  the  output  of  manufactured  goods  in  the 
country  having  increased  more  than  50  per  cent  over 
1913.  A  very  large  proportion  is  also  due  to  the  in- 
creased quantity  and  value  of  the  natural  products 
of  the  country  exported. 

With  a  favorable  trade  balance  of  one-half  bil- 
lion dollars,  Canada  is  easily  able  to  absorb  the  in- 
visible interest  balance  estimated  by  Sir  Thomas 
White,  the  Minister  of  Finance  (February,  1916)  at 
$187,000,000  annually,  of  which  $150,000,000  is  due 


86  BANKING  PRINCIPLES 

Great  Britain  and  the  balance  to  the  United  States. 

Within  the  last  tv.o  years,  not  only  has  Canada 
practically  ceased  to  depend  upon  foreign  loans,  but 
she  is  to-day  financing  her  own  hea\y  war  expendi- 
tures and  in  addition,  placing  large  sums  at  the  dis- 
posal of  the  mother  country  for  use  on  this  side  of  the 
Atlantic. 

Economj^  efficiency  and  increased  i^roduction 
brought  about  a  remarkable  change  in  the  foreign 
trade  balances  and  also  in  the  banking  situation. 
With  busy  factories,  steady  increase  in  bank  deposits 
and  favorable  trade  balances,  Canada  is  now  in  a  posi- 
tion not  only  to  render  valuable  aid  to  the  Allies  in 
the  prosecution  of  the  war,  but  is  also  able  to  con- 
sider the  remedial  measures  necessary  to  offset  the 
economic  reaction  that  is  expected  when  peace  is 
finally  declared. 

The  following  statement  show^s  the  position  of  the 
banks  as  a  w^hole  for  the  month  ending  October  31, 
1916: 

Millions     Per  cent 
of  of  net 

Liabilities:  Dollars     liabilities 

Deposits    1,549  98 

Circulation   145  9 

Bills  payable   5 

Sundry  liabilities    7  1 

1,706       108 
Less : 

Notes     and     checks     of     other 

banks,  etc 97 

Central  Gold  Reserve,  etc 38  135  8 

1,571        100 


NOTE  ISSUES  87 

Millions  Per  cent 

of  of  net 

Dollars  liabilities 

Capital  paid  up 113 

Reserve  and  undivided  profits .  .       132             245  16 


1,816       116 


Assets: 

Cash  reserve 485  31 

Liquid  reserve 360  23 

Loans 913  59 

Real  estate  and  mortgages ....  50 

Other  assets 8  3 


1,816       116 


The  principal  increase  is  found  in  the  deposits 
which  have  increased  nearly  $400,000,000  since  June, 
1914,  while  commercial  loans  in  Canada  decreased 
$156,000,000  during  the  same  period.  The  increase 
in  savings,  or  time  deposits,  is  most  gratifying,  and 
would  be  more  so  if  it  were  entirely  the  result  of 
thrift  on  the  part  of  the  small  depositors ;  part  of  it, 
however,  represents  the  cash  surplus  of  manufac- 
turers and  large  corporations  whose  prosperity  has 
converted  them  from  bank  borrowers  to  bank  deposi- 
tors. 

The  credits  gi'anted  to  date  by  the  Canadian  banks 
to  the  British  Government  for  expenditure  in  con- 
nection with  munitions  amount  to  $120,000,000,  and  in 
January,  1917,  they  agreed  to  advance  an  additional 
$25,000,000  for  the  same  purpose.  During  Novem- 
ber, arrangements  were  also  completed  with  a  number 


88  BANKING  PRINCIPLES 

of  the  Canadian  banks  by  representatives  of  the  Brit- 
ish Government  for  a  six  months'  credit  of  $20,000,000 
for  the  purchase  of  wheat  in  Canada,  making  a  total  of 
$165,000,000. 

It  will  be  apparent  from  a  study  of  the  statement 
that  the  chief  present  problem  of  the  Canadian  banks 
is  not  so  much  the  obtaining  of  new  deposits  as  the 
remunerative  and  short  time  employment  of  those  they 
already  have  with  a  view  to  being  in  a  strong  posi- 
tion when  the  war  comes  to  an  end,  to  assist  in  the 
process  of  adjustment  from  war  to  peace  conditions — 
a  matter  that  is  engaging  the  serious  attention  of  all 
thinking  men  in  Canada. 


REVIEW 

Describe  the  various  forms  of  currency  used  in  Canada.  What 
currency  is  legal  tender? 

What  is  meant  by  elasticity  in  currency?  How  does  the 
Canadian  system  of  note  issue  provide  for  this  ? 

What  situation  proved  the  excellence  of  the  Canadian  banking 
system  ?     How  ? 

Why  does  the  branch  bank  system  work  particularly  well  in 
Canada? 


CHAPTER  VI 

ANALYSIS  OF  A  BANK  STATEMENT 

1.  Bank  statements. — The  Bank  Act  requires  the 
banks  to  furnish  the  government  with  monthly  state- 
ments of  their  assets  and  habihties,  and  in  addition  to 
these,  an  annual  statement  to  the  shareholders.  The 
latter  differs  only  slightly  in  detail  from  the  monthly 
statements,  and  is  submitted  to  the  shareholders  at  the 
annual  general  meeting,  accompanied  by  the  profit- 
and-loss  statement  and  the  report  of  the  auditors. 
The  annual  reports  of  the  several  banks  appear  at 
various  dates  during  the  year,  principally  during  the 
winter  months.  The  monthly  and  annual  state- 
ments are  published  in  the  various  financial  and  other 
papers  and  are  subjected  to  the  closest  sci-utiny  and 
analysis  both  by  the  press  and  the  banks  themselves. 

The  totals  of  the  combined  monthly  statements  of 
the  banks  as  pubhshed  by  the  government  are  of  par- 
ticular interest,  as  the  figiu-es  generally  afford  a  very 
fair  barometer  of  the  financial  condition  of  the  coun- 
try. 

To  the  average  man  a  bank  statement  has  no  more 
than  a  passing  interest.  Even  if  he  goes  so  far  as  to 
compare  the  statement  of  one  bank  with  another,  the 
bare  figures  tell  him  very  little  more  than  that  one 

"89 


90 


BANKING  PRINCIPLES 


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BANK  STATEMENTS  91 

bank  has  larger  deposits  or  loans  than  the  other,  but 
as  to  the  standing  or  earning  power  of  the  banks  in 
question,  he  can  form  but  a  faint  idea  until  he  has 
compared  them  on  a  conmion  percentage  basis,  say,  to 
total  assets.  A  full  understanding  of  a  statement  of 
a  bank  forms  a  very  good  introduction  to  the  actual 
practice  of  the  business;  and  in  order  to  present  the 
leading  features  in  the  most  comprehensive  form  the 
statement^  on  page  90  (Figure  4)  has  been  pre- 
pared. This  is  based  on  the  annual  statements  of 
several  banks,  with  the  amounts  under  the  various 
headings  reduced  to  a  percentage  to  total  assets.  For 
comparison,  a  percentage  to  total  liabilities  to  the 
public  is  also  given.  The  several  headings  will  be  con- 
sidered briefly  in  detail,  and  should  be  studied  with 
special  reference  as  to  their  relation,  the  one  with  the 
other.  The  percentages  will  be  referred  to  as  dollars 
in  discussing  them. 

A  bank  statement  is  primarily  intended  to  show  the 
distribution  of  the  assets  of  a  bank  and  to  whom  they 
ultimately  belong,  the  public  or  the  shareholders. 
The  bank  occupies  a  dual  relation  to  the  public ;  it  is, 
on  the  one  hand,  a  borrower  of  credit  and,  on  the 
other,  a  lender.  The  prime  qualification  for  success- 
ful banking  is  so  to  command  the  public  confidence 
that  the  public  will  deposit  its  money  freely  and  con- 
tinuously.    The  liabilities  of  a  bank  to  the  public  are 

1  This  statement  should  also  be  compared  with  the  percentage  of  the 
combined  monthly  statements  of  all  the  Canadian  banks  as  reported  to 
the  government  for  the  month  of  July,  1913,  Figure  2. 


92  BANKING  PRINCIPLES 

therefore  of  the  most  vital  importance  to  its  existence 
and  will  be  considered  first. 

2.  Deposits  payable  after  notice. — A  reference  to 
the  statement  will  show  that  nearly  60  per  cent  of  the 
liabilities  to  the  public  consist  of  interest-bearing  de- 
posits or,  as  they  are  sometimes  called,  tune  deposits 
or  savings  bank  deposits.  They  form  the  largest  indi- 
vidual item  in  the  statement  with  the  exception  of  cur- 
rent loans.  Time  deposits  are  so  called  because  they 
are  deposits  made  in  the  savings  bank  department  of  a 
bank  and  under  the  rules  of  the  department  are  sub- 
ject to  a  withdrawal  notice  of  ten  or  fifteen  days. 
Practically,  they  are  payable  on  demand,  as  no  bank 
now  makes  a  practice  of  exacting  the  required  notice, 
altho  the  majority  still  retain  a  clause  to  that  effect 
in  their  pass  books.  All  these  deposits  bear  interest 
at  the  rate  of  three  per  cent  compounded  semi-an- 
nually. 

The  chief  difficulty  a  bank  experiences  in  this  kind 
of  deposit  lies  in  the  fact  that  a  certain  class  of  the 
public  is  inclined  to  look  upon  a  savings  bank  account 
as  a  convenience  as  well  as  an  investment;  the  two  are 
not  compatible.  A  time  deposit  requires  a  small  re- 
serve and  a  minimum  of  bookkeeping  and  a  three  per 
cent  rate  leaves  a  margin  of  profit  to  the  bank,  but  to 
give  three  per  cent  on  an  account  subject  to  frequent 
checking  is  another  matter  and  would  be  likely  to  re- 
sult in  an  expense  to  tlie  bank  rather  than  a  profit. 
In  fact,  of  late  years  many  of  the  savings  bank  de- 


BANK  STATEMENTS  93 

posits,  thru  competition,  have  been  allowed  to  develop 
into  ordinary  checking  accounts. 

Theory  as  well  as  experience  in  Canada  has  shown 
that  no  bank  can  afford  to  pay  a  higher  rate  than  three 
per  cent  without  seriously  affecting  its  position.  In 
fact  an  increase  of  even  one-half  or  one  per  cent  would 
change  the  present  net  profits  of  the  majority  of  the 
banks  into  a  loss.^  Deposits  bought  too  dearly  must 
be  fully  employed  because  interest  and  dividends  must 
be  earned  in  some  way.  Competition  prevents  a  bank 
from  lending  money  to  legitimate  enterprises  at  a 
higher  rate  than  the  market  rate;  consequently  a 
l)ank  paj^ing  a  high  rate  for  its  deposits  is  forced  to 
invest  its  money  in  risky  undertakings,  or  else  to  main- 
tain inadequate  reserves,  both  very  dangerous  and  un- 
desirable expedients. 

Fortunately,  the  bulk  of  the  savings  bank  deposi- 
tors are  quite  content  to  use  their  savings  bank  ac- 
counts for  the  purpose  intended — a  depositing  place 
for  their  surplus  money.  Each  person  who  keeps  a 
bank  account  does  so  for  his  own  convenience,  but 
the  result  is  an  enormous  control  of  credit  placed  at 
the  disposal  of  the  industries  of  the  country  thru  the 
agency  of  the  banks  and  their  branches.  In  fact  with- 
out these  deposits  banks  could  render  but  little  assist- 
ance to  the  trade  and  commerce  of  the  countiy.  The 
steadiness  of  these  deposits,  the  fact  that  by  the  law 
of  average  they  can  be  relied  upon  to  remain  fairly 
constant  in  amount  and  that,  except  in  very  stringent 

1  See  Section  2-2,  also  Chapter  on  Bank  Cost  Accounting. 


94  BANKING  PRINCIPLES 

times,  they  are  constantly  increasing,  is  the  basis  of 
the  commercial  credit  system  of  Canada. 

3.  Demand  deposits. — Demand  deposits  represent 
amounts  due  to  individuals  and  firms  payable  on  de- 
mand. No  interest  is  paid  on  these  accomits  except 
in  special  cases  where  a  large  dormant  balance  is  kept 
which  could  otherwise  be  transferred  to  the  savings 
bank  department.  The  average  current  accounts  are 
frequently  run  at  a  loss,  and  were  it  not  for  the  col- 
lateral profits  accruing  from  the  connection  in  the 
shape  of  exchange,  discount  and  the  like,  the  burden 
of  operating  them  would  be  serious.  The  average 
cost  of  carrying  a  small  account  has  been  variously 
estimated  at  from  $15  to  $2o  per  annum,  to  cover 
this  expense  a  full  balance  of  at  least  $300  is  neces- 
saiy. 

In  order  to  prevent  the  abuse  of  the  checking 
privilege  some  of  the  banks  make  a  nominal  charge  for 
carrying  small  checking  accounts,  but  it  is  a  question 
even  then  if  the  bank  comes  out  ahead. 

The  ratio  of  total  deposits  to  the  capital  and  re- 
serve of  the  average  bank  is  so  large  that  even  a  small 
increase  in  the  interest  rate  or  in  the  expense  of  op- 
erating the  deposits  will  materially  affect  the  earnings 
on  capital,  imless,  as  has  already  been  pointed  out, 
tlie  question  of  maintaining  adequate  reserves  is  neg- 
lected. In  a  lecture  on  "Interdependence  of  Trade 
and  Banking"  George  H.  Pownall,  an  English 
banker,  in  referring  to  the  question  of  banking  profits, 
says : 


BANK  STATEMENTS  95 

Hanking  would  not  be  possible  if  its  present  lines  were 
seriously  changed.  We  have  to  bear  in  mind  that  the  busi- 
ness of  banking,  like  every  other  kind  of  business  of  long 
standing,  has  evolved  itself  by  daily-accumulating  expe- 
rience. I  believe  that  depositors  cannot  expect  a  greater 
return  than  they  now  obtain,  unless  there  were  some  general 
change  in  the  supply  of,  and  the  demand  for,  loanable  capi- 
tal. Bankers  do  not  take  in  deposit  money  as  an  invest- 
ment for  the  depositor.  The  money  comes  in  at  the  will  of 
its  owner,  without  notice,  and  is  withdrawn  without  notice. 
That  consideration  governs  the  employment  by  bankers  of 
their  deposit  money.  They  have  individually  to  judge  from 
the  circumstances  of  their  particular  business  what  per- 
centage of  cash  to  their  total  liabilities  they  need  to  keep 
in  their  tills,  what  percentage  of  cash  they  shall  keep  un- 
employed to  insure  the  public  confidence  in  the  stability  of 
their  institution,  and  what  percentage  of  their  liabilities  to 
the  public  shall  be  represented  by  first-class  securities,  and 
first-class  securities  so  written  down  in  price  that  nothing 
but  an  extraordinary  public  catastrophe  shall  reduce  their 
selling  price  below  the  figures  at  which  they  appear  on  the 
balance-sheet,  and  so  produce  an  apparent  deficiency  in  the 
assets  of  the  bank.  To  keep  money  unemployed  is  to  lessen 
earning  power;  to  hold  first-class  securities  is  to  obtain  less 
than  the  average  rate  of  return  on  money  employed  in  loans, 
and  to  write  them  down  to  a  safe  level  is  a  form  of  insurance 
that  expert  opinion  demands  of  a  banker. 

It  is  not  only  from  within  that  these  matters  have  to  be 
looked  at,  it  is  also  from  without.  There  is  a  large  class  of 
the  public  perfectly  able  to  reckon  up  the  safety  or  inse- 
curity indicated  by  the  broad  lines  of  a  bank  balance-sheet, 
and,  in  the  long  run,  the  strongest  institutions  get  the  de- 
posits. Paradoxical  as  it  may  seem,  a  banker's  balance- 
sheet  must  exhibit  an  ability  to  pay  any  proportion  of  the 
banker's  liabilities  likely  to  be  called  for  by  nervous  people 
in  times  of  stress,  not  merelj'  because  the  call  for  repayment 
needs  to  be  faced,  but  also  because  to  exhibit  strength  is  to 
disincline  people  to  make  the  demand. 


96  BANKING  PRINCIPLES 

4.  Deposits  elsewhere. — These  amount  to  $6.90  ^ 
and  represent  deposits  by  individuals  and  firms  made 
in  branches  outside  of  Canada.  Part  of  these  de- 
posits in  all  probability  bear  interest.  Combining 
them  with  the  deposits  maintained  by  foreign  banks 
gives  a  total  of  nearly  $9  representing  funds  supplied 
by  depositors  outside  of  Canada.  An  examination  of 
the  asset  side  of  the  statement  shows  that  the  greater 
part  of  this  amount  is  invested  as  a  quick  asset  in  call 
loans  outside  of  Canada  and  on  deposit  with  foreign 
banks.  This  question  will  be  fully  considered  in  con- 
nection with  call  loans. 

5.  Due  banks  in  Canada. — Owing  to  the  fact  that 
practically  every  Canadian  bank  is  represented  by 
branches  in  the  redemption  centers  and  other  large 
towns,  there  is  no  necessity  for  it  to  maintain  balances 
with  other  banks  for  the  protection  of  its  interests  at 
those  points,  and  any  balances  which  may  be  due  be- 
tween banks  in  Canada  are  merely  as  matters  of  con- 
venience in  connection  with  collection  arrangements. 

6.  Due  to  banks  in  foreign  coimtries. — Under  this 
heading  are  included  all  amounts  due  to  foreign  cor- 
respondents and  represent  balances  which  are  main- 
tained by  banks  of  Great  Britain,  United  States,  Eu- 
rope and  elsewhere  which  have  business  relations  with 
Canada. 

7.  Dominion  and  provincial  governments. — The 
branches  of  the  banks  act  as  depositaries  of  the  Domin- 
ion and  provincial  governments,  and  transfer  funds 

1  Read  thus:    "$6.90  out  of  every  $100  due  the  public." 


BANK  STATEMENTS  97 

received  at  their  various  branches  to  Ottawa  or  to  the 
several  provincial  capitals.  All  customs,  internal 
revenue  and  Post  Office  receipts,  including  the  de- 
posits of  the  Postal  Savings  Bank,  are  deposited  by 
the  federal  officers  in  the  local  branches  of  the  various 
banks  thruout  Canada,  and  are  transmitted  by  them 
to  Ottawa  for  the  credit  of  the  government.  Gov- 
ernment checks  of  every  description,  including  those 
issued  on  account  of  withdrawals  from  the  Postal  Sav- 
ings Bank,  are,  by  the  Bank  Act,  payable  without 
charge  at  any  branch  of  any  bank  in  Canada. 

Altho  the  collection  and  disbursement  of  the  na- 
tional revenues  involve  a  great  deal  of  work,  it  is  done 
willingly  by  the  banks,  not  only  in  a  way,  as  a  return 
for  the  note  issue  privilege,  but  also  as  an  appreciation 
of  the  practical  and  economical  manner  in  which  the 
government  handles  its  revenues  and  funds.  So  effi- 
ciently is  this  done  thru  the  banks  that  no  disturb- 
ance is  ever  made  in  business  or  financial  circles  by  the 
movement  of  government  moneys,  notwithstanding 
their  very  large  aggregate.  All  revenues  received  are 
left  with  the  banks  for  commercial  use  until  ultimately 
disbursed  by  the  government.  There  is  no  wasteful 
piling  up  of  gold  in  government  vaults ;  every  cent  is 
allowed  to  do  its  share  in  the  economic  development 
of  the  countiy  until  w^anted. 

The  net  balance  due  to  the  government  may  be  mo- 
bile, and  at  times  comparatively  small,  but  the  princi- 
ple is  sound  and  works  well  in  every  respect.  It 
would  be  almost  impossible  to  devise  a  scheme  for  the 

XVI— 8 


98  BANKING  PRINCIPLES 

collection  and  disbursement  of  government  revenues 
that  would  work  more  smooth^  or  efficiently. 

Canada  in  her  scientific  administration  of  govern- 
ment funds  differs  from  almost  every  other  country. 

The  balances  of  the  provincial  governments  consist 
principally  of  deposits  in  connection  with  the  Inland 
Revenue  Department  and  judiciary  accoimts.  The 
balances  due  the  Dominion  and  provincial  govern- 
ments are  privileged  claims  on  the  assets  of  a  bank  and 
rank  above  those  of  other  depositors. 

8.  Circulation. — The  nature  of  this  liability  has 
been  fully  explained  in  Chapter  V.  It  will  be  no- 
ticed that  the  amount  given  in  the  statement  is  less 
than  the  paid-up  capital.  No  bank,  especially  one 
with  numerous  branches,  would  feel  safe  in  increasing 
its  circulation  over  this  margin  except  during  the  pe- 
riod of  emergency  currency.  During  that  period, 
namely,  September  first  to  February  twenty-eighth, 
the  circulation  could  be  increased  to  $9.19. 

In  addition  to  the  pi-otecticm  offered  to  the  note- 
holder by  the  general  five  per  cent  redemption  fund  of 
all  the  banks,  the  statement  shows  that  the  circulation 
of  $Q.54!  is  protected  by  the  total  assets  of  the  bank 
and  the  double  liability  of  the  shareholder,  $120.39, 
or  practically  over  $91  for  every  $5  in  circulation. 
Both  the  emergency  currency  and  the  central  gold 
reserves  will,  under  certain  conditions,  prove  of  great 
advantage  both  to  the  public  and  the  banks,  but 
neither  will  be  profitable  to  the  banks.  The  emer- 
gency currency  bearing  interest  at  five  per  cent  will  be 


BANK  STATEMENTS  99 

availed  of  at  a  decided  loss,  while  the  central  gold  re- 
serve will  result  in  a  small  loss. 

9.  Capital  and  reserve. — The  total  liability  to  the 
public  is  equal  to  $88.31  of  the  total  assets,  and  the  bal- 
ance, $11.69,  belongs  to  the  proprietors  or  share- 
holders. The  latter  consists  of  capital,  $6.33,  and  re- 
serve and  undivided  profits,  $5.36.  A  reference  to 
the  profit-and-loss  sheet  on  page  120  shows  that  the 
dividends  declared  were  equal  to  10  per  cent  of  the 
capital,  or  5.47  per  cent  on  the  capital  and  reserve. 
The  net  profit  earned  on  capital  and  reserve  is  10.50 
per  cent  or,  as  it  is  generally  published,  19.30  per 
cent  on  the  paid-up  capital.  The  method  of  basing 
earnings  on  the  percentages  to  paid-up  capital  is  a 
misleading  one,  and  should  be  abandoned  by  the  banks 
and  financial  papers  or  used  only  in  conjunction  with 
the  percentage  on  capital  and  resei*ve.  To  base  earn- 
ings on  capital  not  only  gives  an  erroneous  idea  to  the 
public  of  the  earning  powers  of  banks,  but  does  not 
form  a  fair  method  of  comparison. 

In  case  of  the  insolvency  of  a  bank  the  shareholders 
are  liable  to  be  called  upon  for  an  amount  equal  to  the 
par  value  of  their  shares. 

10.  Specie  and  Dominion  notes. — Under  this  head- 
ing are  included  not  only  the  gold  and  large  legal 
tender  held  by  the  bank  for  its  cash  reserve  and  clear- 
ing house  settlements,  but  it  includes  also  the  till  and 
change  money  at  the  various  branches.  The  latter, 
however,  forms  a  veiy  small  proportion  of  the  whole. 

The  only  reference  made  by  the  Bank  Act  to  a  cash 


100  BANKING  PRINCIPLES 

resen^e  is  in  connection  with  the  requirement  that  at 
least  40  per  cent  of  the  cash  reserve  must  consist  of 
Dominion  notes.  It  is  left  entirely  to  the  judgment 
of  the  individual  banks  themselves  to  fix  their  own 
cash  reserves,  and  tho  experience  so  far  has  fully  borne 
out  the  wisdom  of  non-interference  in  this  connection 
on  the  part  of  the  government.  Considering  that 
practically  all  the  till  money  is  in  the  form  of  a  bank's 
own  notes,  the  average  cash  reserve  maintained  by  the 
banks  of  about  10  per  cent  to  12  per  cent  has  proved 
fully  adequate  at  all  times.  Some  banks  maintain  a 
higher  and  some  a  slightly  lower  rate  than  the  above 
according  to  their  circumstances  or  requirements,  the 
ratio  varying  with  the  same  bank  at  different  times. 
The  daily  redemption  of  notes  and  checks  thru  the 
clearings  all  over  Canada  acts  as  a  constant  check  to 
any  tendency  on  the  part  of  a  bank  to  lower  its  re- 
serve below  a  certain  limit. 

11.  Notes  and  checks  of  other  hanks. — This  amount 
represents  notes  and  checks  of  other  banks  in  process 
of  clearing.  These  have  been  deposited  by  customers 
during  the  day,  and  in  the  ordinary  course  are  pre- 
sented and  redeemed  thru  the  "clearing"  the  following 
morning.  As  the  customer  is  given  credit  the  same 
day  and  the  bank  does  not  receive  returns  until  the 
following  day,  this  amount  represents  a  loss  of  one 
day's  interest  to  the  banks  and  forms  a  very  consider- 
able item  in  the  course  of  a  year.  The  average 
amount  outstanding  under  this  heading  for  all  the 
banks  in  1912  was  nearly  $70,000,000,  representing  a 


BANK  STATEMENTS  101 

steady  loan  to  the  public  for  that  amount  without  in- 
terest. The  average  note  circulation  for  1912  was 
$100,000,000 ;  this  item  offset  it  70  per  cent.  In  addi- 
tion to  this  the  amount  of  checks  in  transit  between 
the  branches  of  the  different  banks  themselves  would 
run  considerably  over  $100,000,000. 

12.  Deposits  with  other  banks. — These  amounts 
represent  the  balances  maintained  in  the  United 
States,  Great  Britain  and  elsewhere  in  connection 
with  exchange  operations,  and  make  also  a  very  useful 
way  of  carrying  a  certain  proportion  of  the  bank's  re- 
serve. These  balances  combined  with  specie.  Do- 
minion notes  and  the  notes  and  checks  of  other  banks 
form  $18.28  of  the  bank's  total  assets,  are  generally 
known  as  quick  assets.  With  the  exception  of  a  few 
of  the  bank  accounts,  on  which  a  low  rate  of  interest 
is  sometimes  obtained,  the  quick  assets  do  not  earn 
interest. 

13.  Securities. — The  securities  held  amount  to  $7.59 
of  the  total  assets  and  consist  of  municipal  bonds  and 
other  first-class  investments.  The  banks  are  not  re- 
stricted in  their  choice  of  this  class  of  securit^^  and 
may  purchase  not  only  government,  provincial  and 
municipal  bonds,  but  also  the  bonds  of  domestic  and 
foreign  railways  and  industrial  corporations.  Banks 
look  upon  these  securities  as  a  kind  of  secondary'  re- 
serve, and  include  them  with  call  loans  among  their 
liquid  assets. 

14.  Call  loans  in  Canada. — Call  loans  in  Canada 
represent  advances  made  to  brokers  and  other  cus- 


102  BANKING  PRINCIPLES 

tomers,  principally  the  former,  on  the  security  of  first- 
class  stocks  and  bonds,  with  an  average  margin  of 
some  twenty  points  below  the  market  value  of  the 
stock  and,  if  loaned  conservatively  and  watched  care- 
fully, form  a  safe  and  remunerative  asset. 

Call  loans  in  Canada  are  not  call  loans  in  the  strict 
acceptance  of  the  word.  The  securities  given  as  col- 
lateral have,  as  a  rule,  only  a  hmited  market  princi- 
pally confined  to  Canada.  Comparatively  few  of 
them  are  listed  on  the  stock  exchanges  of  New  York 
and  London,  and  they  consequently  cannot  be  looked 
upon  as  a  means  of  increasing  the  cash  reserve  of  the 
country  in  case  of  emergency.  An  individual  bank, 
in  ordinar}^  times,  can,  of  course,  reduce  its  call  loans 
in  Canada  at  any  time  for  its  own  purpose,  the  brokers 
simply  borrowing  from  another  bank  to  meet  the  call, 
but  in  a  general  emergency  a  prompt  response  to  a 
call  by  a  considerable  number  of  banks  could  not  be 
relied  upon. 

Under  these  circumstances  the  rate  of  interest 
charged  on  these  loans  is  considerably  higher  than  that 
obtaining  on  strictly  call  loans  in  New  York  and  Lon- 
don, and  is  only  slightly  lower  than  the  rate  charged 
on  commercial  loans,  seldom  falling  below  five  per 
cent.  In  times  of  financial  stringency  the  rate  on 
call  loans  is  generally  higher  than  the  commercial 
rate,  w^hich  remains  practically  unchanged. 

The  Canadian  custom  of  requiring  a  man  to  con- 
fine his  borrowing  to  one  bank — the  one-bank  policy 
as  it  is  called — does  not  apply  to  brokers  w^io  from  the 


BANK  STATEMENTS  103 

nature  of  their  business  borrow  where  they  can,  the 
loans  depending  entirely  on  the  securities  pledged, 
rather  than  on  the  financial  standing  of  the  borrower. 
A  broker  is  therefore  a  customer  of  one  bank  but  a 
borrower  from  many.  These  latter  naturally  look 
after  their  own  commercial  customers  first,  and  the 
broker,  not  being  a  regular  customer,  is  of  only  sec- 
ondary consideration,  and  he  is  loaned  any  surplus 
monej^  of  the  bank  after  the  requirements  of  the  com- 
mercial and  other  customers  have  been  met. 

Banks  are  frequently  accused  of  encouraging  specu- 
lation on  the  stock  market  at  the  expense  of  their  com- 
mercial customers,  but  this  is  certainly  far  from  the 
case,  as  will  be  vouchsafed  for  by  any  broker. 

15.  Call  loans  elsetchere. — The  call  loans  carried 
by  certain  of  the  larger  banks  in  New  York  and  Lon- 
don subject  them  to  a  great  deal  of  undeserved  criti- 
cism, as  it  is  a  common  belief  on  the  part  of  the  public 
and  the  average  newspaper  man  that  the  Canadian 
banks  lend  money  in  New  York  because  of  the  higher 
rates  obtainable  there.  Such  criticism  betrays  a  total 
ignorance  of  the  nature  of  the  Canadian  bank  re- 
serve for,  if  these  call  loans  were  not  maintained,  the 
Canadian  borrower  would  be  no  better  off  than  now. 
The  banks  would  have  no  alternative  but  to  carry  the 
amount  in  gold  in  their  own  vaults.  This  would  not 
only  mean  a  loss  of  earning  power  to  the  banks,  but 
would  also  cripple  them  in  the  foreign  exchange  and 
other  facilities  which  they  now  offer  the  public. 

If  these  critics  would  take  the  trouble  to  examine 


104  BANKING  PRINCIPLES 

the  government  statement  and  ascertain  the  net 
amount  of  Canadian  money  which  is  invested  in  call 
loans  outside  of  Canada,  they  would  doubtless  be  sur- 
prised at  the  results. 

Take  for  instance  the  foreign  loans  in  the  govern- 
ment statement  for  the  month  ended  June  30,  1913: 

Assets: 

Balance  due  by  banks  in  the 

United   Kingdom $15,941,257 

Balances     due     by      foreign 

banks 33,165,595 

Call  loans  elsewhere  tlian  in 

Canada    89,363,520 

Current  loans  elsewhere  than 

in  Canada 36,894,681 

$175,365,053 

Liabilifies: 

Due      depositors       elsewhere 

than  in  Canada $104,289,782 

Due  banks  in  United  King- 
dom           11,755,653 

Due   foreign   banks 7,656,846 

$123,702,281 
Net  amount  suppHed  bv 

Canada    '.        51,662,772 

$175,365,053 

The  critic  would  point  out  that  Canadian  banks  had 
over  $175,000,000  of  their  assets  in  foreign  loans  and 
bank-balances,  and  that  this  should  be  loaned  to  Cana- 
dian borrowers.  They  seldom  look  at  the  other  side 
of  the  return  which  shows  that  over  $123,000,000  of 
this  amount  represents  outside  capital  on  deposit  in 


BANK  STATEMENTS  105 

the  banks,  leaving  only  $52,000,000  as  the  actual 
amount  supplied  by  Canadian  banks  toward  a  very  im- 
portant part  of  their  reserve.  This  is  only  3.42  per 
cent  of  the  total  assets,  an  insignificant  amount  com- 
pared with  the  real  benefits  which  it  creates. 

As  regards  earning  a  higher  rate  of  interest  in  the 
foreign  call  markets,  the  argument  is  fallacious.  The 
rate  for  call  loans  in  Canada  is  seldom  below  five  per 
cent,  while  the  call  loan  rate  in  New  York  seldom  rises 
above  three  per  cent,  and  the  rates  on  call  and  short 
loans  in  London  are  usually  lower  than  those  which 
prevail  in  New  York.  The  average  rate  for  call 
loans  in  Canada  during  June,  1913,  was  G^/o  per  cent, 
and  the  average  call  loan  rate  in  New  York  during 
the  same  period  was  2.35  per  cent,  from  which  must 
be  deducted  the  heavy  state  tax  on  loans  of  foreign 
corporations  in  New  York,  which  made  the  net  rate 
received  by  the  Canadian  banks  less  than  two  per  cent. 
At  this  rate  it  would  certainly  be  to  the  advantage  of 
the  banks  to  confine  themselves  entirely  to  Canadian 
call  loans  or  even  place  money  on  deposit  with  one 
another  at  three  per  cent.  The  banks,  however,  fully 
realize  that  safety  must  be  considered  before  profit, 
and  that  the  investment  in  outside  call  loans  provides 
the  best  form  of  reserve,  next  to  the  actual  gold  in 
their  vaults. 

New  York  is  one  of  the  international  money  mar- 
kets of  the  world  to  which  funds  flow  freely  from 
abroad.  Gold  can  be  obtained  there  at  any  time. 
The   Canadian  banks  have  on  numerous  occasions 


106  BANKING  PRINCIPLES 

tested  their  ability  to  liquidate  loans  in  New  York  and 
bring  them  to  Canada  in  the  shape  of  gold.  New 
York  is  within  half  a  day's  journey  from  Montreal 
or  Toronto,  and  to  all  intents  and  purposes  is  just 
as  convenient  as  if  the  gold  were  kept  in  Montreal  or 
Toronto. 

Sir  Edmund  Walker,  in  an  interesting  article  in 
the  Mo7ietary  Times  on  this  subject,  concludes  with 
the  following  example  of  the  actual  working  of  this 
form  of  reserve  during  the  panic  of  1907: 

That  the  banks  draw  freely  upon  their  funds  out  of 
Canada  to  meet  the  requirements  of  their  Canadian  busi- 
ness was  very  conclusively  demonstrated  at  the  time  of  the 
last  United  States  panic.  According  to  the  Government 
Bank  Statement  of  September  30,  preceding,  the  position  as 
regards  the  outside  accounts  of  the  banks  was  as  follows : 

Call  loans  outside  Canada $63,158,601 

Current   loans   outside   Canada ....        25,794,092 


$88,952,693 

Deposits    and   balances   due   outside 

Canada    76,178,950 


Net       amount       employed       outside 

Canada    ' $12,773,743 

The  panic  in  the  United  States  may  be  said  to  have  com- 
menced in  October,  1907,  and  at  November  30,  later,  the 
position  of  the  Canadian  banks  as  regards  their  outside  ac- 
counts had  changed  to  the  following: 

Call  loans  outside  Canada $41,198,293 

Current  loans  outside  Canada 23,576,315 


$64,774,608 


BANK  STATEMENTS  107 

Deposits   and   balances    due   outside 

Canada    67,616,113 


Net    balance    oxving     hy     Canadian 

banks    outside   Canada $2,841,505 

The  tight  money  conditions  which  existed  in  Canada  at 
the  end  of  1907  and  the  early  part  of  1908,  led  in  all  parts 
of  the  country  to  a  clamor  against  the  banks,  who  were 
accused  of  lending  in  New  York,  moneys  gathered  from  their 
Canadian  customers  and  needed  in  Canada.  But  it  will  be 
seen  from  the  above  figures  that  during  a  period  when  call 
money  commanded  very  high  rates  in  New  York,  the 
Canadian  banks  in  less  than  two  months  reduced  their  call 
loans  outside  of  Canada  by  $22,000,000  and  that  by  the 
end  of  November,  instead  of  having  Canadian  funds  em- 
ployed outside  Canada,  the  balance  was  actuall3^  the  other 
wa}^  to  the  extent  of  $2,84fl,000,  a  condition  of  affairs 
which  continued  several  months  into  1908. 

In  the  payment  of  its  debts  due  abroad  or  in  selling  ex- 
change against  commodities  shipped  by  Canada,  New  York 
is  the  market  where  all  such  transactions  must  be  settled 
and,  therefore,  ready  money  to  be  available  in  the  operations 
of  a  Canadian  Bank  is,  in  the  majority  of  cases,  needed  in 
New  York. 

A  careful  examination  of  the  evidence  must  make  the 
following  clear  to  any  intelligent  person : 

1.  That  the  banks  lend  money  in  New  York  at  a  much 
lower  average  rate  than  loans  produce  in  Canada ; 

2.  That  the  high  rates  of  interest  so  often  referred  to 
occur  only  at  rare  occasions  coincident  with  panic,  and  do 
not  materially  affect  the  average  rate  earned ;  and  that  at 
the  time  of  such  high  rates  the  Canadian  banks  are  almost 
always  withdrawing  money  from  New  York  instead  of  send- 
ing it  there. 

3.  It  is  the  power  to  withdraw  money  at  such  times  which 
enables  the  Canadian  bankers  to  support  their  customers, 
and  it  is  largely  because  of  this  power  that,  altho  the  finan- 


108  BANKING  PRINCIPLES 

cial  history  of  the  United  States  is  marked  with  frequent 
panics,  no  financial  panic  has  taken  place  in  Canada  in 
recent  times. 

4.  The  object  of  the  loans  in  the  United  States,  there- 
fore, is  not  to  enlarge  the  profits  of  the  Canadian  banks  but 
to  enable  them  to  do  justice  to  their  customers  in  time  of 
stress.  Such  loans  are  an  evidence  of  caution  and  wisdom 
in  the  interest  of  Canada  and  the  policy  should  be  the  sub- 
ject of  praise  by  critics  of  Canadian  banks  and  not  of  dis- 
praise.^ 

16.  Reserves. — Including  call  loans  and  securities 
the  average  reserve  maintained  by  the  Canadian 
banks  lies  between  35  per  cent  and  40  per  cent  of  the 
total  assets,  of  which  about  10  per  cent  is  in  cash  and 
Dominion  notes,  10  per  cent  in  amounts  due  from 
other  banks,  and  the  balance  in  securities  and  call 
loans.  The  banking  conditions  are  so  varied  in  the 
different  sections  of  the  country  and  in  different  insti- 
tutions that  it  would  be  impossible  to  establish  a  fixed 
legal  reserve  which  would  suit  all  conditions  and  sea- 
sons. Past  experiences  have  demonstrated  that  the 
question  may  be  left  safely  with  the  individual  banks 
themselves.  The  cash  reserve  of  the  Canadian  banks 
compares  favorably  with  the  general  average  of  the 
national  banks  of  the  United  States. 

The  fixed  legal  reserve  of  the  national  banks  of  the 
United  States  has  been  compared  to  certain  beds  in  a 
hospital  which  were  always  reserved  for  emergency, 
and  on  the  occasion  of  a  gi-eat  disaster  the  superin- 
tendent refused  to  permit  the  beds  to  be  used,  assert- 

"i- Monetary  Times,  Toronto,  Jan.  6,  1912. 


BANK  STATEMENTS  109 

ing  that  they  were  to  be  reserved  for  emergencies. 
To  establish  a  legal  reserve  means  that  when  a  bank 
uses  its  reserve  for  what  it  is  intended,  it  breaks  the 
law  and  becomes  subject  to  severe  penalties.  Altho 
there  is  no  law  or  understanding  on  the  subject  in 
Canada  it  is  generally  conceded  that  the  total  quick 
assets  of  a  bank  should  not  be  allowed  to  fall  below 
15  per  cent,  of  which  at  least  eight  per  cent  shall  be 
in  cash  and  the  balance  in  notes  and  checks  of  other 
banks,  and  in  bank  balances.  In  the  statement  under 
consideration  it  will  be  noticed  that  the  quick  assets 
amount  to  18.28  per  cent  and  liquid  assets  to  34.84 
per  cent,  or  nearly  40  per  cent  of  the  liabilities  to  the 
public. 

With  the  establishment  of  the  centi-al  gold  reserves, 
certain  new  phases  will  arise  in  connection  with  the 
computation  of  the  cash  and  other  reserves.  This 
feature  has  been  very  clearly  explained  in  an  article 
published  in  the  Financial  Times,  Montreal,  August 
16,  1913,  which  reads  as  follows: 

That  the  new  system  will  necessitate  a  somewhat  different 
method  of  computing  the  strength  or  weakness  of  a  bank  in 
point  of  reserves  is  evident.  Or  rather,  while  the  method 
will  remain  the  same,  the  standard  will  have  to  be  adjusted. 
The  gold  deposited  in  the  Central  Reserve  cannot,  it  is 
plain,  be  regarded  as  an  available  cash  reserve,  except  to  the 
extent  to  which  there  is  no  currency  issued  against  it.  Gold 
which  is  being  employed  as  the  basis  of  currency,  under  a 
law  which  requires  the  holding  of  a  full  dollar  in  specie  for 
every  dollar  of  the  corresponding  notes,  is  not  an  asset  at 
all :  but  neither,  on  the  other  hand,  are  the  notes  of  liability. 
The   issue   of  notes   against  deposited   gold,   therefore,   de- 


110  BANKING  PRINCIPLES 

creases  the  amount  of  cash  assets,  but  does  not  increase  the 
amount  of  liabilities.  But  the  process  of  issuing  additional 
currency  implies  the  receipt  by  the  bank  of  something  with 
which  that  currency  is  purchased  by  the  person  who  takes 
it  out.  So  far  as  concerns  the  special  additional  currency 
taken  out  in  the  autumn  and  returned  before  spring — which 
is  the  only  class  of  circulation  to  which  the  Gold  Reserve 
clauses  will  at  present  apply,  since  the  ordinary  issue  power 
of  the  banks  up  to  the  limit  of  their  capital,  without  gold 
deposit  will  for  a  good  man}^  years  suffice  to  look  after  the 
all-the-year-round  requirements  of  the  nation — practically 
all  of  it  is  taken  from  the  banks  in  exchange  for  grain  re- 
ceipts, drafts  on  grain  shipments,  and  similar  high-grade, 
short-term,  readily  negotiable  securities.  These  securities 
have  in  themselves  a  certain  value  as  reserve.  They  are  not 
to  be  indiscriminately  ranked  with  the  ordinary  commercial 
loan  which  forms  the  bulk  of  the  all-the-year-round  business 
of  the  banks,  for  they  are  based  upon  a  commodity  which 
is  at  all  times  salable,  and  they  possess  a  negotiable  value 
far  in  excess  of  that  of  ordinary  commercial  paper.  In  ad- 
dition to  this,  they  will  be  steadily  disposed  of  by  the  banks 
in  the  international  money  market,  in  proportion  to  the 
speed  with  which  the  crop  moves  to  seaboard ;  and  if  money 
is  tight  and  reserves  low  it  is  in  the  power  of  the  banks  to 
exert  much  pressure  to  get  the  crops  moved  rapidly — as  they 
doubtless  will  do  this  season.  So  that  while  there  will  be 
an  apparent  reduction  in  the  reserve  strength  of  many  if 
not  all  the  banks  when  grain  payments  commence,  it  will  be 
much  more  apparent  than  real ;  and  the  gold  which  is  taken 
from  the  banks'  control  to  form  a  basis  for  the  extra  cur- 
rency can  in  case  of  need  be  replaced  without  any  great 
difficulty  or  sacrifice. 

17.  Current  Joans. — Current  loans  form  the  larg- 
est individual  item  in  the  statement,  and  consequently 
represent  the  bulk  of  a  bank's  investment.  This  is  an 
asset  which  requires  the  most  careful  and  unremitting 


BANK  STATEMENTS  111 

attention  on  the  part  of  the  branch  manager  and  the 
head  office. 

Current  loans  can  be  broadly  divided  into  advances 
to  customers  and  bills  and  notes  maturing.  The  lat- 
ter are  the  more  desirable  because  they  are  principally 
composed  of  trade  bills,  with  a  currency  of  from  sixty 
to  ninety  days,  and  as  a  rule  can  be  relied  upon  to  be 
retired  at  maturity.  A  good  portfolio  of  bills  is  no 
mean  factor  as  a  part  of  the  reserve.  Canadian 
banks  as  a  rule  refuse  to  take  longer  term  paper  than 
that  of  three  or  four  months'  currency;  in  fact  the 
average  currency  of  a  good  bill  file  should  not  exceed 
six  weeks,  which  would  mean  a  steady  flow  of  money 
coming  in  every  day,  even  if  only  50  per  cent  of  the 
items  maturing  were  paid  in  full.^ 

Advances  to  customers,  however,  cannot  be  relied 
on  to  any  such  extent.  They  may  be  divided  into 
four  classes: 

(a)  Advances  made  to  customers  on  the  security 
of  produce  and  other  merchandise; 

(b)  Advances  made  to  customers  on  stocks,  bonds, 
notes  and  other  collaterals; 

(c)  Advances  made  to  customers  on  notes  other 
than  trade  bills;  and 

1  An  interesting  calculation  may  be  made  in  any  office  by  rebating  in- 
terest on  the  daily  total  of  the  maturing  notes  and  bills  in  the  diary. 
The  total  thus  arrived  at  will  show  the  amount  that  would  have  to  be  re- 
bated supposing  all  the  notes  were  paid  on  the  day  selected.  Taking 
this  total  rebate,  ascertain  for  how  many  days  it  would  pay  interest  on 
the  total  amount  of  immatured  time  items.  The  number  of  days  repre- 
sents the  average  currency  of  the  bill  file.  The  actual  results  in  one 
branch  varied  between  41  and  45  days'  currency. 


112  BANKING  PRINCIPLES 

(d)  Advances  made  to  customers  on  single  name 
paper. 

The  first  two  call  for  very  little  comment,  and,  if 
well  margined,  form  a  desirable  asset.  The  third 
class,  altho  secured  by  two  or  more  names,  is  not  so 
desirable  from  a  banker's  point  of  view,  as  it  may  com- 
prise a  certain  amount  of  accommodation  paper.  Ad- 
vances to  customers  by  means  of  single  name  notes 
are  less  objectionable,  providing  the  customer's  state- 
ment shows  a  sufficient  margin  of  quick  assets  to  war- 
rant the  loan,  and  that  there  is  a  definite  understand- 
ing between  the  bank  and  the  customer  as  to  the  des- 
tination of  the  loan,  and  when  and  how  the  advance  is 
to  be  paid.  Occasionally  this  latter  class  of  advance 
is  made  by  means  of  overdraft.  This,  however,  is  a 
practice  that  should  not  be  encouraged  as  it  is  ob- 
jectionable for  many  reasons  which  will  be  given 
later.  ^ 

It  is  the  two  latter  classes  of  notes  which  give  the 
most  anxiety  and  trouble  to  the  banker.  Unless 
great  care  is  taken,  the  bank  is  apt  to  become  a  part- 
ner, as  it  were,  in  more  or  less  undesirable  undertak- 
ings. It  is  here  we  find  the  dead  loans,  safe  enough 
no  doubt  so  far  as  ultimate  payment  is  concerned,  but 
still  not  banking  transactions. 

Advances  are  made  to  business  firms  and  others  that 
are  in  their  way  more  or  less  permanent,  sometimes 
consciously  so,  sometimes  made  so  by  force  of  cir- 
cumstances.    How  can  payment  of  such  loans  be  ob- 

1  See  Section  10,  Chapter  VII. 


BANK  STATEMENTS  113 

tained  within  a  reasonable  time?  Or  in  case  of  fail- 
ure what  can  the  bank  do  with  the  wornout  works  or 
the  old-fashioned  mill?  It  finds  itself  a  partner,  fre- 
quently principal  partner,  in  the  business. 

It  is  therefore  most  necessary  for  a  bank  to  avoid 
advances  of  this  nature.  It  should  endeavor  to  keep 
its  loans  in  as  liquid  a  condition  as  possible,  and  in  rea- 
sonable proportion  to  its  deposits. 

Leroy-Boileau,  in  his  "Traite  d'Economie  Poli- 
tique," saj^s: 

Banks  obtain  their  resources  generally  from  the  most 
mobile  part  of  a  country's  capital — from  funds  scarcely 
constituted,  destined  for  an  investment  whose  character  has 
not  been  determined  or  for  consumption  slightly  postponed- 
In  view  of  this  origin  of  the  larger  part  of  banking  re- 
sources, it  follows  that  the  capital  lent  by  banks  ought 
ahvays  to  remain  in  the  condition  of  circulating  capital, 
easily  convertible  into  money,  and  should  not  be  trans- 
formed into  fixed  and  inconvertible  capital.  Banks  are  in- 
stituted to  make  capital  circulate,  not  to  lock  it  up. 

18.  Overdue  debts. — These  call  for  very  little  com- 
ment; the  gi-eater  portion  consists  of  notes  which  are 
overdue  owing  to  temporary  delays  in  settlement. 
Farmers  are  notorious  delinquents  in  this  respect. 
They  have,  however,  a  good  excuse,  particularly  in  the 
West,  owing  to  the  distances  they  generally  live  from 
the  bank.  There  is  not  the  same  excuse,  however, 
for  ordinary  business  paper  being  overdue,  and  the 
same  leniency  is  not  extended  to  a  business  man, 
whose  credit  is  seriously  affected  if  he  allows  his  pa- 
lmer to  frequent  the  overdue  file.     A  portion  of  the 

XVI — 9 


114  BANKING  PRINCIPLES 

I 

overdue  consists  of  doiihtful  debts  for  which  full  pro- 
vision has  been  made. 

19.  Real  estate. — The  law  is  very  strict  as  to  banks 
holding  real  estate  other  than  that  required  for  their 
own  premises,  nor  can  they  lend  on  mortgages.  They 
may,  however,  take  a  mortgage  as  additional  security 
for  a  debt  akeady  incurred,  and  in  case  of  foreclosure 
they  are  allowed  to  bid  in  the  property,  but  cannot 
hold  it  over  a  certain  length  of  time.  Real  estate 
other  than  bank  premises,  in  the  statement,  repre- 
sents lands  which  have  been  acquired  in  this  manner 
and  bought  in  by  the  bank  in  its  effort  to  improve  the 
position  of  a  doubtful  or  a  bad  debt.  Banks  nat- 
urally try  to  get  rid  of  property  thus  acquired  as 
quickly  as  possible  and,  in  making  sales,  frequently 
sell,  for  part  cash  and  accept  security  for  the  balance  in 
the  shape  of  a  mortgage.  These  are  shown  in  the 
statement  as  "mortgages  on  real  estate  sold." 

20.  Bank  premises. — The  Bank  Act  permits  banks 
to  o^\Ti  real  estate  and  erect  buildings  for  the  purposes 
of  their  business.  It  has  always  been  a  question  as 
to  whether  banks  have  the  right  to  erect  a  building 
and  rent  any  part  not  required  for  banking  purposes. 
The  question  is  not  a  serious  one  and  should  be  left 
to  the  banks  themselves. 

2\.  Profit  and  loss  statement  of  a  hank. — A  study 
of  the  profit  and  loss  statement  of  the  various  Cana- 
<lian  banks  for  the  past  years  shows  very  conclusively 
that,  notwithstanding  the  large  increase  in  the  amount 
of  deposits  and  the  volume  of  business  transacted. 


BANK  STATEMENTS  115 

the  profits  have  not  kept  pace  with  the  continuous 
increase  in  operating  expenses,  and  the  average  net 
earnings  on  assets  during  the  last  decade  has  dropped 
from  1.50  per  cent  to  1.26  per  cent.  Banks,  in  com- 
mon with  all  other  business  concerns,  have  had  to  pay 
out  more  in  salaries,  rents  and  other  expenses,  yet 
it  is  seldom  realized  that  banking  charges  to  the 
public  have  not  been  increased.  On  the  contrar>% 
they  have  by  force  of  competition  and  other  causes 
been  considerably  reduced.  The  table  on  page  117 
shows  the  percentage  of  net  earnings,  etc.,  of  ten  of 
the  Canadian  banks  for  the  year  1912.  It  affords 
several  interesting  comparisons  and  demonstrates 
that  the  earnings  of  Canadian  banks  are  by  no  means 
commensurate  with  the  risk  and  work. 

Column  No.  1  will  assist  in  giving  the  reader  some 
idea  of  the  proportion  of  capital  and  reserve  to  total 
deposits  or,  if  the  reserve  ratio  is  required,  it  will  he 
found  by  dividing  this  percentage  into  100;  thus,  the 
deposits  of  bank  No.  1  are  six  times  its  capital  and 
reserve. 

The  second  column  gives  the  proportion  of  the  total 
assets  represented  by  interest  deposits,  and  shows 
what  a  very  important  part  the  interest-bearing  de- 
posits take  in  the  existence  of  a  bank  and  how  easily  a 
slight  increase  in  interest  would  materially  affect  the 
net  profits. 

The  third  column  gives  the  net  profits  earned  on  the 
total  assets  of  the  banks.  Considering  the  large 
amount  of  the  turnover  during  the  year,  and  the  dou- 


116  BANKING  PRINCIPLES 

ble  liability  of  the  shareholders,  these  figures  consti- 
tute a  very  small  return  for  the  amount  of  work  done 
and  the  risk  taken. 

Column  No.  5  shows  the  percentage  of  net  profit  to 
capital,  and  is  the  method  usually  adopted  by  banks 
and  financial  papers  in  commenting  upon  the  profit 
and  loss  sheet  of  a  bank.  As  it  shows  the  interest  on 
only  a  part  of  the  liability  to  the  shareholder  this  per- 
centage affords  no  useful  information,  unless  used  in 
conjunction  with  the  figures  given  in  column  No.  6. 
This  gives  the  percentage  of  net  profits  to  capital  and 
reserve  and  shows  the  true  net  earnings  on  the  pro- 
prietor's capital  before  any  dividends  have  been  de- 
clared or  amounts  written  off. 

Column  No.  7  gives  the  percentage  of  net  earnings 
before  any  dividends  have  been  declared  or  amounts 
written  off.  These  last  two  columns  will  show  where 
the  market  value  exceeds  the  book  value  or  vice  versa. 

Column  No.  8  gives  the  actual  dividends  paid.  It 
will  be  noted  that  many  of  the  banks  prefer  to  give 
their  shareholders  an  increased  return  on  their  invest- 
ment in  the  shape  of  a  bonus,  rather  than  an  increase 
in  the  dividend  rate.  It  is  evident  from  this  that 
banks  are  unwilling  to  make  a  permanent  increase  in 
their  dividends  in  case  they  might  not  be  able  to  main- 
tain it,  owing  to  the  very  narrow  margin  of  profit  on 
which  they  have  to  work. 

Column  No.  9  shows  the  yield  on  the  market  price 
of  the  stock  on  the  basis  of  the  figures  given  in 
column  10. 


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118  BANKING  PRINCIPLES 

22.  Interest  on  deposits. — From  time  to  time  it  is 
advanced  in  the  public  press  and  elsewhere  that  the 
banks  should  pay  a  higher  rate  on  their  deposits  than 
three  per  cent,  especially  in  view  of  the  fact  that  they 
are  getting  six  and  seven  per  cent  for  their  money. 
Tho  nearly  the  whole  of  a  bank's  gross  revenue  is 
derived  from  interest  on  its  loans,  the  net  profit  is 
necessarily  governed  by  the  difference  between  the 
deposit  and  loaning  rates  which,  in  Canada  as  in  all 
other  countries,  bear  a  fixed  ratio  to  each  other,  firmly 
established  by  both  theory  and  experience.  Any  at- 
tempt to  deviate  from  this  fundamental  rule  of  corre- 
lation, either  by  raising  the  deposit  rate,  or  unduly 
lowering  the  loaning  rate,  can  lead  to  but  one  end, 
as  many  banks  have  found  to  their  cost.  The  average 
difference  between  the  deposit  and  loaning  rate  of  Ca- 
nadian banks  is  three  per  cent,  and  any  increase  in  the 
former  must  be  accompanied  by  a  corresponding  in- 
crease in  the  latter. 

That  this  is  no  arbitraiy  ruling  can  be  conclusively 
proved  by  examining  the  profit-and-loss  statement  of 
any  bank  on  a  basis  of  giving  a  fair  return  to  the  share- 
holder for  his  investment,  it  being  first  conceded  that 
every  business  should  pay  interest  upon  the  capital 
actually  invested  in  it  at  a  rate  determined  by  the  risk 
or  responsibility  incurred  in  the  business.  This  is  a 
practice  that  no  business  man  will  question,  and  there 
is  no  reason  why  the  banking  business  should  be  ex- 
cepted from  its  application. 

jVo  man  is  willino-  to  invest  his  monev  in  an  active 


BANK  STATEMENTS  119 

business  which  involves  responsibihty  and  the  meeting 
of  keen  competition,  unless  he  thinks  there  is  the  prob- 
ability of  more  than  an  ordinary  return  in  mterest. 
Banking  business  is  certainly  not  free  from  such  com- 
petition, risks  and  responsibilities,  and  unless  a  bank 
can  make  a  reasonable  profit  upon  its  proprietors'" 
investment,  the  shareholders  might  as  well  put  the 
bank  into  liquidation  and  invest  their  capital  where 
it  will  be  free  from  risks  of  this  nature.  In  mak- 
ing such  an  apportionment  from  banking  profits 
for  capital  invested,  six  per  cent  should  be  considered 
a  very  reasonable  rate  to  accord  to  shareholders  for 
the  use  of  their  money,  and  after  deducting  that 
amount  from  the  net  profits  of  the  bank  the  remainder 
represents  the  compensation  for  banking  services  and 
the  like.  The  application  of  this  principle  to  the  an- 
nual profit  and  loss  sheets  of  ten  banks  given  on  page 
117  demonstrates  very  graphically  how  impossible  it 
would  be  for  any  of  these  banks  to  pay  a  higher  rate 
than  three  per  cent  on  their  deposits  without  increas- 
ing their  loaning  rate  according^. 

Column  4  in  the  table  on  page  117  shows  the 
amount  of  profit  remaining  after  deducting  six  per 
cent  on  the  capital  and  reserve  of  the  different  banks. 
A  comparison  of  these  figures  with  those  given  in  the 
second  column  will  show  that  only  one  bank,  the 
fourth,  would  have  sufficient  profit  left  to  increase  the 
rate  on  its  interest  deposits  one  per  cent;  the  remain- 
ing banks  would  show  a  serious  deficit.  That  bank 
No.  4  could  increase  its  deposit  rate  to  four  per  cent  is 


120  BANKING  PRINCIPLES 

due  to  several  reasons,  all  more  or  less  temporary. 
In  the  first  place,  the  net  profits  for  1912  happen  to  be 
unusually  large ;  secondly,  the  ratio  of  capital  to  total 
deposits  is  small  (colimm  No.  1);  and,  lastly,  the 
interest-bearing  deposits  are  only  slightly  over  50  per 
cent  of  the  total  assets  (column  No.  2).  Similarly, 
only  two  of  these  banks  could  afford  to  increase  their 
rate  on  deposits  to  3/4  per  cent,  but  would  have  prac- 
tically nothing  left  for  even  ordinary  appropriations 
for  reserve,  depreciation  and  the  like. 

23.  Profits  of  the  "Percentage  Bank." — Referring 
to  the  statement  of  the  "Percentage  Bank"  given  on 
page  90  the  following  profit  and  loss  sheet  of  that 
bank  may  prove  of  interest : 


Per  cent 

of  Total 

Per  cent 

I.iahility 

of  Total 

to  Public 

Assets 

The  net  profits  for  the  year 

after  providing  for  all  bad 

and  doubtful  debts  amount 

to 

1.38 

1.22 

Dividends    paid 72  .64 

Written  off  bank  premises.  .  .        .15  .13 

Transferred  to  rest  account.  .        .16  .14 

Transferred   to   pension   fund       .02  .02 

Balance   carried   forward 33  .29 

The  net  profit  is  found  after  paying  all  the  current 
expenses  of  the  bank  for  the  year,  and  providing  for 
any  loss  from  bad  or  doubtful  debts.  The  sharehold- 
ers do  not  by  any  means  get  the  whole  of  the  net  prof- 
its, only  a  httle  over  50  per  cent  of  the  amount  being 


BANK  STATEMENTS  121 

paid  in  dividends,  equal  to  10  per  cent  on  the  capital 
or  5/4  per  cent  on  the  capital  and  reserve  combined. 
Of  the  balance  about  11  per  cent  is  applied  to  writing 
off  bank  premises  account,  12  per  cent  is  transferred 
to  reserve  or  rest  account,  a  small  amount  to  the  pen- 
sion fund  of  the  bank,  and  24  per  cent  is  carried  for- 
ward in  the  shape  of  undivided  profits  for  contin- 
gency. 

24.  Bank  premises.— It  is  a  soimd  theory  in  busi- 
ness life  that  no  plant  or  building  should  be  carried  at 
cost  on  the  books  of  an  institution  for  any  great  length 
of  time,  but  that  each  year  a  certain  amount  should  be 
written  off  for  depreciation.  This  practice  is  fol- 
lowed by  all  well-managed  banks.  It  must  be  remem- 
bered in  this  connection  that  no  matter  how  suitable  a 
building  may  be  for  banking  purposes,  it  would  not 
be  ver)^  suitable  for  any  other  business  and  at  a  forced 
sale  might  not  realize  much  more  than  the  value  of  the 
land.  Roughly,  the  depreciation  in  the  statement  un- 
der discussion  amounts  to  five  per  cent  of  the  bank 
premises  and  absorbs  11  per  cent  of  the  net  profits. 

25.  Reserve  fund. — The  rest,  or  resei*\'e,  fund  of  a 
bank  is  now  looked  upon  in  the  light  of  a  greater  mar- 
gin of  safety  to  the  depositors,  and  the  aim  of  every 
bank  is  evidently  to  make  the  reserve  fund  equal  to 
the  capital.  The  original  purpose  of  the  rest  fund 
was  to  accumulate  the  surplus  profits  of  good  years 
for  use  in  leaner  years  to  maintain  dividends  and  the 
like,  if  necessar}^  Today,  however,  any  impairment 
of  the  rest  fund  would  be  considered  almost  as  serious 


122  BANKING  PRINCIPLES 

a  step  as  the  wiping  out  of  part  of  the  capital  itself. 
The  original  intention  of  tlie  rest  fund  is  now  fuliilled 
by  the  maintenance  of  a  larger  amount  in  undivided 
profits,  which  serves  exactly  the  same  purpose. 

The  rest  account  in  a  Canadian  bank  may  therefore 
be  considered  as  intended  for  tbe  protection  of  the  pub- 
lic, and  the  undivided  profits  for  the  protection  of  the 
shareholders. 

In  the  present  instance  about  12  per  cent  of  the  net 
profits  is  used  to  increase  the  reserve,  making  the  latter 
80  per  cent  of  the  capital. 

26.  Gross  profits. — It  has  already  been  pointed  out 
that  the  greater  portion  of  a  bank's  profits  is  derived 
from  the  difference  between  the  interest  on  its  deposits 
and  its  loans.  The  gross  profit,  therefore,  can  be 
found  roughly  by  a  study  of  the  interest-bearing  as- 
sets of  a  bank  and  it  may  be  safely  assumed  that  even 
in  the  best  of  years  a  bank  can  seldom  make  more 
than  between  five  and  six  per  cent  gross  on  its  total 
assets;  that  is,  inclusive  of  exchange  and  all  other 
profits.  In  the  statement  of  the  "Percentage  Bank" 
the  interest  earned  on  the  various  assets  may  be 
roughly  estimated,  as  follows: 

Securities     $7.59  at  4^%  .34 

Call  Loans    8.97       5%  .45 

Current  Loans 63.00       6%  3.78 

Real  Estate 2.07       5%  .10 

Sundry    Profits,    Ex- 
change, etc .58 

Making  a  Total  of  5.25  or  5^% 


BANK  STATEMENTS  123 

Turning  to  the  liability  side,  $88.31  is  due  to  the 
public,  of  which  it  is  safe  to  assume  $60  is  interest- 
bearing,  absorbing  $1.80  of  the  gross  profits.  The 
actual  net  profits  are  $1.22.  The  difference,  or  $2.23, 
has  therefore  been  used  for  expenses,  including  allow- 
ance for  bad  debts.  These  figiu'cs  are  of  course  in- 
tended to  be  suggestive,  not  conclusive.  So  many 
features  enter  into  expense  distribution  and  the  gross 
earnings  of  banks  that  it  is  impossible  to  establish  any 
criterion.  Some  of  the  English  banks  publish  the 
amount  of  their  expenses,  but  this  serves  no  useful 
purpose  unless  other  data  is  also  furnished.  The  fact 
remains  that  Canadian  banks  are  confronted  with  a 
very  serious  and  steady  diminution  in  net  profits  owing 
to  competition  on  the  one  hand,  and  constantly  in- 
creasing operating  expenses  and  taxation  on  the 
other.  This  situation  must  be  met  either  by  increasing 
the  charges  or  decreasing  the  expenses.  The  former 
is  a  last  resort  and  there  remains  the  necessity  for  a 
systematic  study  of  costs  with  a  view  to  reducing  ex- 
penses and  eliminating  accounts  or  transactions 
which  have  hitherto  been  a  source  of  loss. 

REVIEW 

What  is  a  bank  statement  primarily  intended  to  show? 

Why  is  it  unwise  for  both  the  bank  and  the  public  to  allow 
savings  deposits  to  be  used  as  checking  accounts  ? 

In  what  sense  are  call  loans  in  Canada  not  call  loans  in  the 
strict  acceptance  of  the  word? 

How  will  the  central  gold  reserve  affect  the  standard  of  com- 
puting the  strength  of  a  bank  in  point  of  reserves  ? 

How  may  a  bank's  gross  profits  be  determined? 


PART  II 
BANKING  PRACTICE 


BANKING  PRACTICE 


CHAPTER  I 

HEAD  OFFICE 

1.  Directors. — The  nominal  executives  of  a  bank 
are  the  president  and  board  of  directors,  who  are 
responsible  not  only  to  the  shareholders  but  to  the 
government  for  the  true  and  faithful  administra- 
tion  of  the  bank's  affairs.  In  practice,  however,  the 
actual  work  of  administration  has  to  be  entrusted  to 
the  general  manager  and  his  staff.  The  work  of  the 
directors  is  rather  of  an  advisory  and  supervisory 
nature.  That  this  supei'vision,  however,  should  not 
be  of  a  perfunctory  character  is  demanded  in  no  un- 
certain terms,  both  by  the  Bank  Act  and  by  public 
opinion. 

The  president,  as  chairman  of  the  board  of  di- 
rectors, occupies  the  most  prominent  position  in  the 
bank,  especially  in  the  eyes  of  the  public,  and  should 
always  be  a  man  who  can  command  public  attention 
and  respect.  In  virtue  of  his  position  the  president 
is  obliged  to  devote  more  of  his  time  to  the  aflPairs  of 
the  bank  than  his  brother  directors;  upon  him  de- 
volves the  checking  and  signing  of  the  bank  returns 

127 


128  BANKING  PRACTICE 

and  other  official  dociiinents.  Daily,  in  conjunction 
with  the  general  manager,  he  must  review  the  po- 
sition and  general  policy  of  the  bank. 

Of  recent  years  the  public  has  demanded  "directors 
who  direct."  No  man  should,  therefore,  accept  a  po- 
sition on  the  board  of  a  bank  unless  he  is  prepared 
not  only  to  attend  the  meetings  regularly,  but  also  to 
take  sufficient  time  to  become  acquainted  with  bank- 
ing in  general  and  the  affairs  of  his  own  bank  in  par- 
ticular. In  other  resj^ects  a  director  should  be  a  man 
of  outstanding  qualifications,  especially  as  regards 
character  and  influence  in  the  community;  he  should 
also  be  a  man  of  large  business  affairs  and  a  good 
judge  of  men. 

The  principal  duty  of  the  directors  at  ordinary 
board  meetings  is  to  discuss  with  the  general  manager 
and  authorize  all  credits  and  loans  which  exceed  a 
certain  amount.  This  amount  or  limit  is  set  by  the 
directors  themselves,  as  it  would  be  physically  im- 
possible for  the  board  to  deal  with  all  the  loans  made 
by  a  bank.  The  majority  of  these  can  safely  be  left 
to  tlie  judgment  of  the  general  manager,  leaving  the 
large  and  important  accounts  for  the  careful  consid- 
eration of  the  board. 

There  are,  of  course,  some  losses  in  small  loans. 
But  the  supervision  of  the  directors  would  not  avert 
them,  and  the  average  is  never  high  enough  to  be 
serious.  It  is  the  larger  loans  which  call  for  the  con- 
stant and  careful  attention  of  the  directors.  Experi- 
ence shows  that  bank  failures  arise  invariablv  from 


HEAD  OFFICE  129 

losses  made  by  the  failure  of  a  small  number  of  large 
accounts,  and  never  from  any  trouble  caused  by  the 
small  accounts.  The  limit  varies  from  $1,000,  in  a 
small  bank,  to  $5,000  or  $10,000  in  a  large  bank.  In 
setting  the  amount,  the  directors  are  guided  by  their 
opinion  of  and  confidence  in  the  general  manager  and 
his  staif,  as  well  as  by  the  volume  of  applications  call- 
ing for  consideration. 

Board  meetings  are  held  once  a  week  and  a  finan- 
cial statement  of  the  affairs  of  the  bank  as  well  as 
a  report  on  all  important  transactions  that  liave  taken 
place  since  the  last  meeting  is  placed  before  them. 
In  some  banks  a  hst  of  the  smaller  loans  authorized 
by  the  general  manager  during  the  week  is  submitted 
and  initialed  by  the  directors  after  reading.  The 
duties  and  responsibilities  of  the  president  and  direc- 
tors are  outlined  in  the  Bank  Act,  to  which  reference 
is  made  in  Chapter  III,  Part  I  of  this  Text. 

2.  General  manager. — The  general  manager  oc- 
cupies the  most  important  position  in  the  bank.  To 
attain  that  rank  a  man  must  not  only  be  a  pro- 
fessional banker  ])y  training  and  instinct,  but  must 
possess  other  outstanding  qualifications.  His  duties 
are  nimierous  and  the  responsibility  heavy.  To  assist 
the  general  manager  in  his  work  of  supervision  and 
control,  there  is  a  head  office  staff  of  highly  trained 
men.  If  the  bank  is  large,  an  assistant  general  man- 
ager is  generally  appointed  to  assist  the  general  man- 
ager, and  to  a  certain  degree  share  some  of  the  re- 
sponsibility. 

XVI — 10 


130  BANKING  PRACTICE 

The  following  officers  are  generally  found  on  the 
head  office  staff  of  a  bank: 

An  assistant  general  manager 

A  superintendent  of  branches 

A  chief  inspector  and  officers  under  him 

A  secretary  and  staff 

A  chief  accountant  and  staff. 

3.  Superintendent  of  branches. — This  officer,  in 
conjunction  with  the  inspection  department,  exer- 
cises a  strict  supervision  over  all  branch  loans,  not 
only  by  a  careful  study  of  the  branch  returns,  but 
also  by  examining  and  passing  on  all  the  applications 
for  credit  submitted  by  the  branches.  He  prepares 
for  the  board  of  directors,  with  his  recommendation, 
all  applications  for  credit  which  are  large  or  impor- 
tant enough  to  be  brought  before  them,  and  assists 
the  general  manager  in  the  disposition  of  the  less  im- 
portant applications.  Altho  the  greater  part  of  the 
superintendent's  work  consists  in  dealing  with  the 
branch  loans,  he  has  many  other  duties  to  perform 
in  comiection  with  his  position,  and  is  in  frequent 
consultation  with  the  general  manager  regarding  the 
pohcy  and  position  of  the  bank.  The  office  is  a  most 
important  one  and  calls  for  special  qualifications  and 
training. 

In  a  large  bank  with  numerous  branches,  it  would 
be  physically  impossible  for  one  man  to  review  the 
work  of  the  whole  bank  in  this  manner,  and  many  of 
the  banks  divide  their  branches  into  provinces  or  dis- 


HEAD  OFFICE  131 

tricts  under  the  charge  of  district  superintendents. 
As  each  of  these  officers  has  from  fifty  to  one  hundred 
branches  to  look  after,  the  position  of  district  or  pro- 
vincial superintendent  is  also  an  important  one. 

In  a  small  bank  the  offices  of  superintendent  of 
branches  and  chief  inspector  are  often  merged  into 
one,  and  the  work  is  conducted  b}^  the  general  mana- 
ger and  inspector.  In  the  larger  banks,  however,  the 
loans  can  only  be  comprehensively  dealt  with  by  a 
process  of  sifting  and  elimination,  according  to  size 
and  importance.  All  loans,  irrespective  of  amount, 
are  subject  to  constant  supervision  both  in  returns  of 
the  branch  and  by  regular  inspections.  In  the  grant- 
ing of  these  loans,  however,  conditions  vary  accord- 
ing to  amount.  Every  branch  manager  is  accorded 
a  limit  up  to  which  he  may  lend  without  direct  refer- 
ence to  the  head  office,  the  amount  varying  with  the 
size  and  importance  of  the  branch.  For  all  amounts 
over  this  limit,  the  application,  with  full  particulars 
and  statements,  must  be  sent  to  the  superintendent  of 
the  district  and  a  copy  of  the  correspondence  to  the 
head  office.  The  district  superintendent  in  his  turn 
has  a  limit  to  the  amount  he  can  authorize.  If  a  pro- 
spective loan  is  larger  than  he  can  deal  with,  he  writes 
to  the  head  office,  recommending  the  application  or 
otherwise,  the  head  office  already  being  in  possession 
of  the  particulars.  At  the  head  office  the  application 
is  dealt  with  by  the  superintendent  in  the  usual  way, 
and  either  authorized  forthwith  by  the  general  mana- 
ger or  referred  to  the  board. 


132  BANKING  PKACTICE 

4.  Chief  inspector. — As  has  been  indicated,  in 
some  banks  this  office  is  combined  with  that  of  the  su- 
perintendent, the  work  being  so  intimately  connected. 
The  chief  inspector  gives  special  attention  to  the 
auditing  and  inspection  of  the  branches  and  sees  that 
every  branch  is  inspected  at  irregular  intervals  at  least 
once  a  year.  As  a  rule  he  personally  conducts  the 
inspection  of  the  larger  branches  and  supervises  and 
directs  the  other  inspectors  in  their  examination  of 
the  rest  of  the  branches.  An  inspection  consists  of 
two  kinds  of  examinations,  namely,  verification  and 
valuation.  The  first  is  called  the  audit  or  routine 
inspection,  and  consists  of  auditing  and  balancing  the 
books  of  a  branch  and  ascertaining  the  existence  of 
all  the  assets  called  for  by  the  books.  Attention  is 
also  given  to  the  general  routine  work  of  the  office 
with  a  view  to  ascertaining  if  instructions  from  the 
head  office  are  faithfully  observed.  This  is  the  first 
stage  of  the  inspection,  and  is  made  by  routine  in- 
spectors or  officers. 

The  second  stage,  or  inspection  proper,  is  made  by 
a  senior  inspector  and  consists  of  a  thoro  analysis 
and  valuation  of  the  loans  and  other  assets  of  the 
branch.  This  is  not  necessarily  made  at  the  same 
time  as  the  audit,  but  the  inspector  visits  the  branch 
as  soon  as  possible  afterward  and  discusses  ev^ery  ac- 
count exhaustively  with  the  manager.  On  his  return 
to  the  head  office  he  embodies  his  criticisms  in  the 
official  correspondence  with  the  branch. 

The  chief  inspector  generally  has  in  his  charge  all 


HEAD  OFFICE  133 

matters  pertaining  to  bookkeeping  methods,  disposi- 
tion of  the  junior  staff,  stationery  forms,  bank  premi- 
ses, furniture,  etc.  Of  course  he  can  delegate  any 
of  these  to  the  care  of  one  of  the  inspectors. 

J.  Secretary. — One  of  the  most  useful  officers  in 
the  head  office  is  an  efficient  secretary  with  initia- 
tive, tact  and  a  good  memory.  The  secretary  forms 
the  connecting  link  between  the  different  depart- 
ments, and  thru  his  hands  passes  all  the  correspond- 
ence received  or  despatched  by  the  head  office.  He 
is  therefore  in  touch  with  any  question  that  may  be 
under  discussion  with  any  of  the  branches,  and  if 
possessed  of  a  good  memory  is  frequently  able  to 
refer  the  general  manager  or  inspectors  to  similar  in- 
stances that  have  occurred  in  the  past  at  other 
branches.  The  secretary  generally  has  charge  of  the 
bank  advertising,  and  deals  with  all  minor  matters 
that  do  not  fall  within  the  province  of  the  other  de- 
partments. 

The  general  diary  of  the  bank  is  kept  by  the  sec- 
retary, who  sees  that  all  the  returns  called  for  by  \\\v. 
Bank  Act  are  promptly  dispatched,  dividends  and 
meetings  duly  advertised,  and  any  court  or  legal  busi- 
ness looked  after  by  the  officer  appointed  to  appear. 

6.  Chief  accountant. — This  officer,  tho  seldom 
heard  of  by  the  public,  fills  a  most  important  place  in 
the  bank,  as  he  is  required  by  the  Bank  Act  to  join 
with  the  president  and  general  manager  in  certifying 
to  the  correctness  of  the  returns  made  to  the  govern- 
ment.    It  is  his  duty  to  combine  the  branch  balance 


134  BANKING  PRACTICE 

sheets  so  as  to  show  the  position  of  the  bank  as  a 
whole,  and  submit  a  true  copy  to  the  directors  every 
week,  to  the  government  every  month  and  to  the 
shareholders  every  year.  The  stock  ledger  and  trans- 
fer book  are  under  his  charge,  as  are  also  all  special 
accounts  such  as  the  pension  and  guarantee  funds  of 
the  bank. 

It  will  be  gathered  from  the  above  that  not  only  is 
the  general  manager  himself  thoroly  in  touch  with 
the  affairs  of  the  bank,  but  he  has  also  a  highly  effici- 
ent staff  about  him,  all  able  to  make  helpful  sug- 
gestions and  if  necessary  to  take  the  initiative  in  any 
matter.  Each  has  his  own  well-defined  duties,  yet 
is  able  to  assume  any  other  work  if  called  upon,  and 
all  are  imbued  with  one  common  aim,  the  well-being 
of  the  bank. 

REVIEW 

\Miat  are  the  principal  duties  of  a  bank  director? 

What  are  the  duties  of  the  superintendent  of  branches?  How 
does  he  regulate  loans  made  at  the  branches? 

In  what  respects  is  the  secretary  one  of  the  most  useful  officers 
of  the  head  office? 

What  are  the  duties  of  the  chief  accountant? 


CHAPTER  II 

HEAD  OFFICE  RECORDS 

1.  Head  office  hookheeping. — A  distinction  must 
be  made  between  the  head  office  and  the  main  office  of 
a  bank.  By  head  office  is  always  meant  the  executive 
office  of  the  bank,  while  the  main  office,  tho  generally 
in  the  same  building,  is  simply  a  branch  office.  Not- 
withstanding its  size  and  importance,  its  relations  to 
head  office  are  exactly  the  same  as  the  most  distant 
branch  so  far  as  routine  matters  and  operations  are 
concerned.  Its  business,  like  that  of  other  branches, 
is  with  the  public.  The  head  office,  on  the  other  hand, 
transacts  no  actual  business  with  the  public,  and  its 
bookkeeping  consists  principally  of  combining  and 
analyzing  the  statements  sent  in  from  the  various 
branches.  Practically  all  this  work  is  done  in  the 
cliief  accountant's  department.  The  machinery, 
however,  is  suprisingly  simple  considering  the  work 
it  accomplishes. 

The  immediate  books  of  the  head  office  consist  of  a 
general  ledger,  a  cash  book,  a  correspondents'  ledger 
with  controlling  account  in  the  general  ledger,  and 
the  stock  transfer  books. 

2.  General  ledger. — The  head  office  general  ledger 
contains  accounts  for  all  the  assets  and  liabilities 
of  the  bank  which  are  not  included  in  the  brancli 

135 


136  BANKING  PRACTICE 

statements:  such  as  capital,  surplus,  undivided  profits, 
head  office  investments,  general  expense  account  and 
the  like. 

At  the  end  of  each  month  every  branch  sends  in  an 
exact  balance  sheet  of  its  general  ledger.  These 
.statements  are  all  summarized  in  specially  ruled  books 
or  sheets  under  the  various  headings  of  the  accounts, 
and,  when  combined  with  the  balance  sheet  of  the 
head  office  general  ledger,  give  the  complete  state- 
ment of  the  bank's  business  required  by  the  Bank 
Act. 

Attention  is  called  to  the  fact  that  after  allowing 
for  the  amount  due  to  or  from  the  head  office  itself, 
the  combined  debit  and  credit  balances  of  all  branch 
clearing  accounts  (Pages  177-179)  will  exactly  offset 
each  other  with  the  exception  of  the  items  in  transit. 
These  outstanding  items  are  analyzed  and  allotted  to 
their  several  destinations  or  accounts,  and  there  is 
consequently  no  branch  clearings  account  balance 
shown  in  either  the  gov'ernment  report  or  the  annual 
rei)orts. 

J}.  Correspondents  ledgers. — Every  bank  finds  it 
necessary,  for  exchange  and  other  purposes,  to  carry 
accoimts  with  correspondents  in  Great  Britain,  the 
United  States  and  other  parts  of  the  world.  For 
simplicity  and  directness  of  accounting  some  of  these 
accounts  are  frequently  carried  at  the  head  office,  and 
the  various  debits  and  credits  from  the  branches  are 
passed  thru  the  branch  clearings  account  as  later  ex- 
plained  (Section  18,  Chapter  IV).     As  the  entries 


HEAD  OFFICE  RECORDS  137 

reach  the  head  office  they  are  posted  direct  from  the 
slips  to  the  several  bank  accounts  in  a  special  ledger. 
Statements  of  the  accounts  are  received  from  the  vari- 
ous correspondents  weekly,  and  in  many  cases  daily, 
and  the  accounts  are  kept  in  constant  adjustment — 
any  item  outstanding  an  undue  length  of  time  being 
made  the  subject  of  immediate  inquir)\ 

4.  Statistical  books. — Apart  from  the  sharehold- 
ers' ledger  and  the  stock  transfer  books  which,  for 
convenience  to  the  public,  are  generally  kept  in  the 
main  office,  all  the  books  used  in  the  head  office  are 
principally  of  a  statistical  or  analytical  nature.  The 
profit  and  loss  returns  from  the  different  branches 
are  all  carefully  analyzed  in  relation  to  the  amount 
of  business  done  and  the  capital  employed.  Daily 
circulation  returns  are  compiled,  and  a  close  watch 
kept  on  the  movement  of  the  bank's  liquid  assets. 
Special  funds,  in  connection  with  guarantees,  pen- 
sions and  the  like,  are  also  administered  from  this 
department. 

5.  Branch  clearings. — The  checking  of  the  branch 
clearings  statements  received  from  the  branches  is 
also  in  charge  of  the  chief  accountant.  The  method 
is  very  simple.  An  ordinary  filing  clip  is  kept  for 
each  branch ;  when  a  statement  is  received,  the  entries 
are  ticked  off  as  far  as  possible  against  the  entries  on 
other  branch  statements,  and  it  is  then  filed  on  its  clip 
to  await  delayed  corresponding  entries.  As  the  entries 
on  each  sheet  are  completely  marked  off,  a  diagonal 
line  is  drawn  across  the  statement,  and  whenever  a 


138  BANKING  PRACTICE 

balance  is  struck  by  the  department  these  dead  sheets 
are  filed  away  in  bundles.  Some  banks  arrange  the 
clips  in  alphabetical  order,  but  the  best  way  is  to 
arrange  them  first  by  provinces,  as  naturally  the  ma- 
jority of  the  entries  are  between  branches  in  the  same 
province.  The  checking  is  also  more  concentrated 
under  the  latter  system. 

6.  Stock  hooks,  etc. — In  the  shareholders'  or  stock 
ledger  an  account  is  kept  with  each  shareholder  in 
which  are  recorded  all  shares  bought  and  sold.  The 
amounts  entered  in  the  account  represent  the  par 
value  of  the  shares,  and  the  sum  of  all  the  balances 
in  this  ledger  will  equal  the  amount  of  the  paid-up 
capital  of  the  bank. 

The  shares  of  a  bank  are  transferable  only  on  the 
books  of  the  bank;  these  are  known  as  "Transfer 
Books."  Each  page  of  the  ti-ansfer  book  is  in  the 
form  of  a  legal  document  by  which  one  person  agrees 
to  transfer  a  certain  number  of  shares  standing  in  his 
name  to  another  person  who  agrees  to  accept  the 
shares.  The  transfer  must  be  executed  by  both 
parties  in  person  or  by  a  properly  executed  power  of 
attorney  appointing  some  one  to  act  for  them.  The 
entries  in  the  stock  ledger  are  made  direct  from  the 
transfer  book. 

The  other  books  used  in  the  stock  department  are  a 
"Register  of  Stock  Certificates  Issued"  and  a  "Divi- 
dend Register."  The  stock  certificates  issued  are  not 
transferable  and  need  not  be  presented  when  a  trans- 
fer is  made. 


HEAD  OFFICE  RECORDS  1S9 

Dividends  are  usually  paid  quarterly  by  check  to 
shareholders  of  record  on  certain  dates,  and  the  divi- 
dend register  is  simply  a  record  of  the  payees  and 
amounts  of  checks  issued. 

A  bank  may  keep  transfer  registers  in  other  prov- 
inces than  that  in  which  the  head  office  is  situated. 
The  books  consist  of  a  stock  ledger  ( a  duplicate  being 
kept  at  the  head  office) ,  in  which  is  kept  the  accounts 
of  shareholders  residing  within  the  province,  a  trans- 
fer book  and  a  register  of  stock  certificates  issued. 
The  head  office  is  advised  regularly  of  all  transfers 
made,  and  altho  certificates  are  issued  at  the  branch 
office,  all  dividend  checks  are  issued  at  the  head 
office. 

7.  Circulation  records. — An  important  duty  of  the 
chief  accountant  is  to  watch  the  circulation  closely 
and  see  that  an  overissue  does  not  occur.  Reports 
are  received  daily  from  the  larger  branches  as  to  the 
amount  of  notes  on  hand,  and  weekly  from  the  smaller 
branches,  and  from  these  the  exact  position  of  the 
note  issue  is  determined. 

Altho  a  bank,  under  ordinary  circumstances,  can 
issue  notes  only  to  the  amount  of  its  paid-up  capital, 
the  invariable  practice  is  to  carry  a  large  supply  of 
circulation  in  the  tills  of  the  branches  thruout  the 
country  so  as  to  be  ready  to  meet,  without  delay,  the 
requirements  for  circulation  at  any  point.  A  bank, 
for  instance,  with  a  paid-up  capital  of  $3,000,000 
would  probably  have  at  least  $5,000,000  at  the  credit 
of  bank  note  account  in  the  head  office  general  ledger. 


140  BANKING  PRACTICE 

Part  of  this  amount  would  be  represented  by  notes 
on  hand  in  the  head  office,  part  by  notes  in  the  branch 
tills,  and  the  balance  would  represent  the  amount  of 
circulation  outstanding. 

At  credit  bank  note  account.  .  .  .  $5,000,000 

Less: 

UnsigTied   notes $500,000 

Soiled    and    mutilated    notes 

awaiting  destruction 400,000 

Notes  held  in  the  tills  of  the 

branches    1,400,000 


$2,300,000         2,300,000 


Total  amount  of  outstanding  cir- 
culation in  the  hands  of  the 
public    $2,700,000 

This  leaves  a  margin  of  $300,000  unissued,  the 
difference  between  authorized  and  actual  circula- 
tion. 

Changes  in  bank  note  accoimt  are  infrequent  and 
occur  only  when  notes  received  from  the  engraver 
are  credited,  or  when  a  debit  entry  is  made  of  the 
amount  of  mutilated  bills  destroyed  by  the  directors. 

Soiled  and  mutilated  notes  are  counted  and  burned 
by  the  directors  whenever  a  sufficient  quantity  has 
accumulated.  A  special  furnace  is  used  for  this  pur- 
pose, and  as  soon  as  the  bills  are  counted  they  are 
placed  in  the  furnace  by  the  directors,  where  they  are 
rapidly  consumed.  A  statement  showing  the  amount 
and   denomination   of  the   notes   destroyed   is   then 


HEAD  OFFICE  RECORDS  141 

signed  by  the  directors  to  be  attached  to  the  monthly 
circulation  return. 

In  the  note  circulation  register,  a  complete  record 
of  the  various  issues  is  kept,  as  well  as  of  all  the  de- 
nominations of  the  notes  themselves. 

8.  Returns  to  head  office. — Every  branch  sends 
to  the  head  office  a  number  of  statements  and  returns. 
These  statements  go  under  different  names  in  the 
various  banks  tho  thej^  vary  but  little  in  their  in- 
tention and  in  the  information  conveyed.  It  is  most 
important  that  all  returns  should  be  carefully  pre- 
pared and  legibly  written  by  the  branch.  An  error 
in  any  one  of  them  is  serious;  it  involves  the  head 
office  in  a  great  deal  of  unnecessary  work  in  locating 
the  difference  and,  obviously,  is  a  serious  reflection 
on  the  ability  of  the  officers  whose  signatures  attest 
the  correctness  of  the  figures.  The  principal  state- 
ments are  as  follows: 

9.  Branch  clearings  statement  (daily). — The 
branch  clearing  statement  is  forwarded  to  the  head 
office  as  soon  as  the  cash  book  for  the  previous  business 
day  has  been  checked.  It  is  signed  by  the  cash-book 
clerk  and  checked  in  every  particular  by  the  account- 
ant, who  also  signs  in  attestation  of  its  correctness. 

10.  Financial  statement. — This  is  forwarded  daily 
])y  the  larger,  and  weekly  by  the  smaller  branches. 
It  is  practically  a  balance  sheet  of  the  branch  gen- 
eral ledger,  either  in  exact  figures  or  approximately 
in  even  thousands.  It  is  important  that  this  state- 
ment should  be  despatched  promptly,  as  the  data  are 


142  BANKING  PRACTICE 

necessary  to  the  chief  accountant  in  arriving  at  the 
amount  of  circulation  outstanding  and  the  general 
movements  of  the  bank's  assets  and  liabilities.  A 
complete  balance  sheet  is  rendered  on  the  last  day  of 
the  month. 

11.  Discount  report. — In  some  banks  this  is  sent  in 
daily,  and  in  some  weekly.  If  sent  in  daily,  it  gen- 
erally takes  the  form  of  a  carbon  copy  of  the  discount 
register,  with  the  manager's  comments  or  explana- 
tions of  the  different  transactions.  If  a  weekly 
statement,  only  transactions  above  a  certain  amount 
are  reported.  The  limit  varies  with  the  importance 
of  the  branch.  All  overdrafts,  no  matter  how  small, 
are  reported  with  explanations.  All  liabihty  ac- 
counts in  the  branch  which  are  out  of  order  in  any 
way,  either  by  the  expiration  of  the  credit  or  for  other 
reasons,  are  listed  in  each  repoi't  until  they  have 
been  adjusted  to  conform  to  head  office  require- 
ments. 

12.  Cash  item  account. — This  return  is  made  uj) 
at  least  once  a  month  and  gives  the  outstanding  sight 
drafts  and  other  cash  items  with  the  date  of  origin 
and  domicile.  A  special  report  should  be  given  on 
any  item  which  appears  to  be  too  long  outstanding, 
thus  anticipating  inquiries  from  the  head  office. 

13.  Balance  sheet. — This  is  made  up  to  the  close 
of  business  on  the  last  day  of  the  month,  and  mailed 
to  the  head  office  not  later  than  the  following  business 
day.  It  is  an  exact  statement  of  the  general  ledger 
of  the  branch,  and  is  used  by  the  head  office  in  com- 


HEAD  OFFICE  RECORDS  143 

piling  the  general  statement  of  the  bank,  or  monthly 
return  to  the  government,  as  it  is  generally  called. 

14.  Overdue  bills. — This  statement  is  required  at 
least  once  a  month,  and  gives  a  list  of  all  overdue 
loans  and  discounts.  It  should  be  the  ambition  of 
every  manager  to  keep  this  list  down  to  a  low  point, 
if  not  entirely  to  eliminate  it.  Any  name  which  ap- 
pears frequently  in  this  Hst  should  be  avoided;  it 
shows  a  lack  of  business  honor,  or  something  worse. 

15.  Monthly  liability  return. — This  return  gives  a 
list  of  all  the  liability  accounts  on  the  books  of  the 
branch  over  a  certain  amount  with  all  necessary  par- 
ticulars regarding  security,  etc.  Some  banks  require 
the  monthly  liability  return  to  contain  the  name  of, 
and  amount,  no  matter  how  small,  due  by  every 
obligant. 

16.  Sundry  returns. — Statements  of  the  expense 
account  of  each  branch,  accompanied  by  the  relative 
vouchers,  are  sent  every  month  to  the  head  office. 
The  closing  of  the  books  at  the  end  of  the  bank's 
fiscal  year  calls  for  a  number  of  returns  for  statistical 
and  other  purposes,  such  as  the  profit  and  loss  state- 
ment, the  report  on  bank  premises,  the  bad  and  doubt- 
ful debts  return,  and  the  like.  In  addition  to  these, 
special  reports  on  various  subjects  may  be  called  for 
from  time  to  time  by  the  head  office. 

17.  Weekly  report  on  business. — In  discussing  the 
Canadian  banking  system,  frequent  reference  is  made 
to  the  very  full  knowledge  possessed  by  the  general 
managers  as  to  the  condition  and  requirements  of 


144  BANKING  PRACTICE 

the  country  as  a  whole.  This  information  is  acquired 
thru  two  separate  channels:  the  weekly  financial 
statement  and  the  weekly  report  on  business.  The 
weekly  financial  statement  from  the  different  branches 
shows  the  fluctuation  of  the  circulation,  loans,  de- 
posits, etc.,  thruout  the  country,  and  forms  an  ex- 
cellent financial  barometer  of  business  conditions. 
The  information  in  these  statements  is  supplemented 
by  weekly  or  fortnightly  letters  from  the  branch  man- 
agers which,  as  a  rule,  cover  the  ground  most  thoroly, 
and  give  a  variety  of  interesting  and  useful  facts. 
Among  other  things  with  which  the  letter  deals  may 
be  mentioned  the  following : 

(a)  Particulars  as  to  prices  and  movements  of  staple 
commodities  such  as  grain,  flour,  cattle,  dairy  produce,  lum- 
ber, etc. ; 

(b)  Acreage,  condition  and  prospects  of  crops,  etc.; 

(c)  Farm  sales  and  other  real  estate  transactions: 

(d)  The  conditions  of  trade  locally,  scarcity  or  other- 
wise of  money,  general  financial  and  commercial  news ; 

(e)  Business  failures  or  indications  of  beginnings  of  lui- 
soundness  in  local  firms,  whether  customers  or  not ; 

(f)  Local  rates  for  money,  domestic  and  foreign  ex- 
change, etc. 

It  is  easilj^  seen  that  no  press  association  or  mer- 
cantile agency  could  possibly  give  the  intimate  in- 
formation as  to  the  country's  condition  thus  afforded 
the  general  managers  thru  the  branches.  By  means 
of  information  thus  regularly  afforded,  Canadian 
banks  are  able  to  see  the  coming  financial  clouds  six 


HEAD  OFFICE  RECORDS  145 

months  or  even  a  year  before  they  appear  on  the  com- 
mercial horizon,  and  thus  not  only  to  take  the  neces- 
sary steps  to  prepare  themselves  for  trouble,  but  also, 
in  the  annual  reports  of  the  bank,  to  warn  their  cus- 
tomers and  the  public  generally  of  the  approaching 
storm. 

18.  Records  of  routine  work. — At  the  end  of  each 
month  there  is  forwarded  to  the  head  office  a  certifi- 
cate signed  by  the  manager  and  accountant,  which 
certifies  to  the  following: 

That  all  the  general  statements  and  work  of  the  office 
have  been  completed  and  verified  for  the  month ; 

That  all  the  overdrafts  shown  in  the  deposit  ledger  dur- 
ing the  month  were  authorized  by  the  manager ; 

That  the  liabilities  of  customers  as  shown  in  the  liability 
ledger  are  correct; 

That  all  interest  computations  in  the  discount  and  ledger 
departments  have  been  independently  verified  by  a  second 
and  competent  officer ; 

That  all  insurance  held  is  in  force ; 

That  the  time-lock  is  running  correctly  and  the  combina- 
tion locks  are  in  satisfactory  condition ; 

That  the  cash  items  account  was  drawn  off,  and  that  all 
outstanding  items  are  satisfactory ; 

That  the  current  deposit  ledger,  savings  bank,  and  lia- 
bility ledger  balances  were  drawn  off  and  found  to  be  cor- 
rect ; 

That  the  notes,  bills,  and  collaterals  were  inventoried  and 
balanced ; 

That  the  collection  register  has  been  regularly  checked, 
and  that  there  were  no  unsatisfactory  outstanding  items ; 

That  goods  pledged  or  warehoused  have  been  examined 
and  found  correct ; 

That  the  draft  account  has  been  balanced. 

XVI— 11 


146  BANKING  PRACTICE 

The  dates  on  which  these  several  balances  were 
arrived  at  are  given,  as  well  as  the  initials  of  the  offi- 
cer who  made  the  check. 

It  is  essential  that  a  complete  record  of  daily 
routine  work,  etc.,  should  be  maintained,  and  some 
banks  require  monthly  reports  from  their  branches 
giving  the  initials  of  the  officers  who  fulfill  the  various 
duties  each  day.  Even  if  this  report  is  not  required 
by  the  head  office  it  is  advisable  to  keep  a  systematic 
record  in  the  office. 

REVIEW 

What  accounts  are  kept  at  the  head  office  of  a  bank? 

Who  keeps  the  circulation  records  of  the  bank? 

Who  makes  up  the  branch  clearing  statement?  How  often  is 
it  sent  to  the  head  office? 

Thru  what  channels  does  the  general  manager  get  complete  in- 
formation about  the  branches  ? 

How  is  the  routine  work  reported  to  the  head  office? 


CHAPTER  III 

THE  BRANCH  STAFF 

1.  Manager. — ^The  directors  are  obliged  to  rely  on 
the  general  manager  to  a  great  extent  for  the  com- 
petent administration  of  the  bank's  affairs,  and  he, 
in  his  turn,  has  to  look  to  the  branch  managers  and 
their  staff  for  an  efficient  and  loyal  discharge  of 
duties,  for  on  the  staff,  more  than  on  any  other 
factor,  depends  the  success  of  the  bank. 

The  making  of  loans  is  a  corollary  of  having  the 
money  to  loan,  and  consequently  the  most  important 
work  of  a  manager  is  to  attract  and  accumulate  de- 
posits by  giving  a  satisfactory  and  effcient  service  to 
customers  and  the  public  at  large.  There  is  no  diffi- 
culty about  making  loans;  the  difficulty  is  to  know 
when  to  refuse  to  make  them.  The  head  office  can 
always  assist  in  the  decision,  but  the  manager  has  only 
the  general  standing  of  the  bank  and  his  own  efforts 
to  rely  on  for  obtaining  deposits.  The  value  of  a 
good  loaning  branch  is  not  denied,  nor  the  fact  that 
loans  frequently  create  deposits;  but  banking  essen- 
tials should  be  considered  in  their  proper  sequence; 
first,  deposits,  then  loans.  No  bank  would  open  a 
branch  simply  to  make  loans;  deposits  or  other  col- 
lateral advantages  must  be  present  or  in  prospect. 

147 


U8  BANKING  PRACTICE 

That  the  loans  at  a  ])ranch  may  exceed  the  deposits 
does  not  alter  the  principle. 

To  attract  deposits,  personality,  efficient  service 
and  a  knowledge  of  human  nature  are  necessary,  but 
the  loaning  of  money,  in  addition,  calls  for  a  high 
degree  of  tact,  ability  and  technical  training.  In 
small  transactions  the  manager  exercises  his  own  dis- 
cretion, within  certain  limits  established  by  the  head 
office  for  each  branch  or  manager.  Loans  exceeding 
this  amount  must  first  be  submitted  to  the  general 
manager  for  authorization.  The  requisites  of  a  good 
loan  will  be  dealt  with  in  another  chapter. 

The  manager  has  many  other  duties  and  responsi- 
bilities besides  obtaining  deposits  and  making  loans. 
He  is  expected  to  give  constant  and  vigilant  super- 
vision to  every  part  of  the  business  of  his  office,  and 
to  the  general  deportment  of  his  staff.  The  fact  that 
he  is  permitted  by  the  head  office  to  delegate  a  certain 
portion  of  this  work  to  the  accountant  or  other  senior 
officer  does  not  relieve  him  of  the  responsibility  for 
anything  that  goes  wrong. 

Except  at  the  small  offices  the  manager  is  not  ex- 
pected to  do  any  of  the  routine  work  of  entering  or 
posting,  but  he  has  a  good  deal  of  work  to  do  in 
connection  with  the  checking  of  the  day's  work. 

2.  Daily  work. — A  manager  will  find  it  of  great 
advantage  to  himself  and  his  staff  to  reach  the  office 
a  little  before  nine.  Not  only  can  more  work  be 
done  between  nine  and  ten  o'clock  than  in  any  other 


THE  BRANCH  STAFF  149 

two  hours  of  the  day,  but  the  manager's  punctuality 
insures  a  like  quality  in  the  staff. 

All  checking  in  the  office  should  be  accomplished 
before  ten  o'clock  in  the  morning. 

The  manager  is  then  prepared  to  receive  and  inter- 
view customers,  and  his  desk  should  be  so  placed  that 
he  can  see  all  who  enter  the  office.  Both  the  manager 
and  the  accountant  should  be  constantly  on  the  alert 
to  see  that  every  customer  receives  prompt  attention. 

During  the  day  the  manager's  time  is  fully  occupied 
with  preparing  applications  for  credit,  general  corre- 
spondence and  interviews  with  customers.  Much  of 
the  manager's  time  is  frequently  wasted  by  customers, 
and  offenders  in  this  respect  should  be  tactfully 
broken  of  the  habit.  Every  minute  of  the  manager's 
time  costs  money  to  the  bank — a  fact  frequently  over- 
looked by  both  the  customer  and  the  manager  himself. 
The  staff  of  a  Canadian  bank  are  designated  gener- 
ally as  officers,  irrespective  of  rank. 

3.  Accountant. — The  position  of  accountant  is  a 
responsible  one.  As  lieutenant  or  deputy  of  the 
manager  he  is  frequently  called  upon  to  assume 
charge  of  the  office  whenever  it  may  be  necessary  for 
the  manager  to  be  absent,  to  which  end  he  should  be 
thoroly  acquainted  with  the  discounts  and  general 
business  of  the  office.  A  gi*eat  part  of  an  account- 
ant's duties  consists  in  relieving  the  manager  of  the 
work  (but  not  the  responsibility)  of  looking  after 
the   routine   and   general   supervision   of   the   office. 


150  BANKING  PRACTICE 

With  the  concurrence  of  the  manager  he  apportions 
the  work  among  the  staff,  clearly  defining  the  duties 
of  each  officer,  sees  that  prompt  and  becoming  atten- 
tion is  given  to  the  public,  devotes  such  direction  and 
teaching  to  his  subordinates  as  they  may  require,  and 
insures  that  all  work  is  punctually  performed,  and 
none  permitted  to  fall  into  arrears. 

The  accountant  is  generally  expected  to  check  all 
statements  and  returns,  to  see  that  nothing  has  been 
omitted,  and  to  sign  or  initial  them  in  attestation  of 
their  correctness,  prior  to  handing  them  to  the  mana- 
ger for  completion. 

The  accountant  jointly  with  the  manager  has  con- 
trol of  the  treasury  cash  and  other  valuables  of  the 
branch.  He  is  also  responsible  for  the  safe-keeping 
of  all  engraved  forms,  such  as  drafts,  money  orders, 
and  the  like. 

4.  Teller. — A  great  deal  of  responsibility  is  at- 
tached to  the  position  of  tlie  officer  who  has  charge 
of  the  cash,  and  kno-WTi  as  teller.  His  principal 
duties  are  the  receiving  of  deposits  and  the  payment 
of  checks.  This  work  requires  great  care  in  order  to 
avoid  a  loss  to  himself  or  to  the  bank.  In  most  banks 
the  tellers  are  required  to  make  good  all  shortages  in 
the  cash.  When  cash  is  over,  however,  the  amount  is 
credited  to  an  account  in  the  deposit  ledger  called 
"cash  over  account." 

In  a  small  office  the  duties  of  paying  and  receiving 
teller  are  fulfilled  by  one  man ;  in  larger  offices,  how- 
ever, the  work  is  performed  by  two  or  more  tellers. 


THE  BRANCH  STAFF  151 

and  a  distinct  division  is  made  between  the  work  of 
receiving  and  paying. 

The  teller  must  scrutinize  closely  all  checks  and 
cash  items  which  are  included  in  the  deposit  in  order 
to  see  that  they  are  properly  indorsed  and  in  form 
as  to  dates,  amounts,  etc.  The  total  is  then  entered 
in  the  teller's  blotter,  and  the  slip  is  handed  to  the 
ledger-keeper  who  posts  the  deposit  in  the  ledger  and 
enters  it  in  the  customer's  pass  book. 

The  only  book  kept  by  the  teller  is  the  blotter  in 
which  all  debits  and  credits  passing  thru  his  hands 
are  entered.  It  has  various  columns,  in  which  the 
entries  are  so  distributed  that  the  totals  can  be  used 
by  the  different  departments  in  proving  the  day's 
work.  At  the  close  of  the  day's  business  the  cash  is 
balanced  and  the  details  of  the  various  denominations 
are  entered  in  the  space  provided  for  the  purpose  in 
the  teller's  balance  book. 

5.  Ledger-keeper. — A  good  ledger-keeper  should 
be  accurate,  quick  and  a  good  writer.  Accuracy  is 
the  most  important  qualification,  as  errors  in  posting 
or  in  extending  the  balance  of  an  account  might  re- 
sult in  a  loss  to  the  bank. 

A  ledger-keeper  should  be  thoroly  familiar  with 
the  signatures  of  the  bank's  customers,  and  be  con- 
stantly on  the  alert  to  detect  forgeries  and  other  ir- 
regularities. 

When  opening  a  new  account  care  should  be  taken 
to  record  in  the  ledger  all  the  necessary  particulars. 
In  the  case  of  accounts  with  partnerships,  societies, 


152  BANKING  PRACTICE 

corporations,  etc.,  both  the  manager  and  ledger- 
keeper  should  see  that  the  necessary  authorization 
and  other  documents  are  lodged  with  the  bank. 

Particular  care  must  be  taken,  when  "marking"  or 
accepting  checks,  to  see  that  they  are  not  written  in 
such  a  way  that  they  can  subsequently  be  changed  to 
a  hirger  amount.  If  there  is  any  space  left  on  either 
side  of  the  written  amount,  it  should  be  filled  in  with 
a  heavy  stroke  of  the  pen. 

G.  CoUection  clerk. — The  collection  department 
is  considered  one  of  tlie  most  important  in  connec- 
tion with  the  business  of  the  bank,  and  the  clerk  in 
charge  of  this  work  must  be  careful  and  methodical 
in  his  work,  and  constantly  on  the  alert,  to  see  that 
all  the  details  in  connection  with  each  item  passing 
thru  his  hands  are  promptly  and  carefully  looked 
after. 

At  most  branches  of  the  bank  the  larger  part  of  the 
items  received  for  collection  come  thru  the  mails  from 
other  branches  and  correspondents,  and  the  majority 
of  these  are  drafts  on  local  merchants  which  require 
to  be  presented  for  acceptance.  The  instructions 
which  accompany  these  items  must  be  noted  and  care- 
fully followed.  Items  which  are  to  be  protested  for 
non-acceptance  or  non-payment  require  special  at- 
tention, as  the  bank  could  be  held  responsible  for  any 
loss  if  the  instructions  are  not  carried  out  to  the 
letter. 

As  the  bank  should  not  hold  a  collection  unac- 
cepted more  than  two  days  if  the  drawee  resides  in 


THE  BRANCH  STAFF  153 

town,  or  over  five  days  if  he  resides  out  of  town,  it 
is  necessary  to  obtain  the  acceptance  without  delay  or 
return  the  item  with  or  without  protest,  as  the  case 
may  be.  It  is,  of  course,  to  the  interest  of  the  bank 
as  well  as  of  the  drawer  to  get  all  items  accepted  if 
possible.  Drafts  with  documents  attached,  such  as 
hills  of  lading,  also  re({uire  special  attention,  and  the 
instructions  regarding  each  must  be  carefully  ob- 
served. 

The  work  in  connection  with  drafts  issued  on  other 
branches  or  correspondents  in  payment  for  collec- 
tions, as  well  as  with  drafts  and  money  orders  sold 
to  customers,  is  generally  performed  by  the  collec- 
tion clerk. 

7.  Discount  clerk. — It  is  the  duty  of  the  discount 
clerk  to  look  after  the  work  in  cormection  with 
all  notes  and  bills  discounted.  Each  note  and  bill 
should  first  be  initialed  by  the  manager,  and  then 
passed  by  the  latter  direct  to  the  discount  clerk,  who 
should  see  that  each  item  is  in  proper  form  as  re- 
gards terms,  date,  indorsement,  and  the  like,  before 
entering  it  in  the  discount  register.  The  interest  is 
then  reckoned  and  the  proceeds  credited  to  the  cus- 
tomer's account  thru  the  discount  blotter.  In  the 
case  of  a  "petty  loan"  a  voucher  is  issued  on  which 
the  proceeds  may  be  drawn  in  cash.  All  interest 
computations  should  be  checked  by  a  second  officer 
to  insure  correctness.  Exchange  on  bills  payable 
at  outside  points  must  also  be  deducted. 

8.  The  junior. — The  duties  of  the  junior,  as  the 


154  BANKING  PRACTICE 

beginner  is  called,  vary  according  to  the  size  of  the 
office.  At  a  small  country  branch  he  will  have  charge 
of  the  collections,  cash  book,  supplementary  cash 
book,  outgoing  mail,  besides  various  other  duties 
which  in  a  large  office  are  performed  by  the  messen- 
ger or  porter.  In  a  large  office  where  there  are  sev- 
eral tellers,  ledger-keepers,  etc.,  his  duties  may  con- 
sist of  only  one  line  of  work.  He  may  be  one  among 
several  in  charge  of  the  supplementary  cash  books, 
and  do  nothing  else  all  day  than  entering  up  deposits 
and  checks;  or  he  may  do  similar  entry  work  in  vari- 
ous other  departments. 

REVIEW 

Describe  the  duties  of  the  branch  bank  manager.     What  are 
the  duties  of  the  teller?     Of  the  ledger  keeper? 
For  what  work  is  the  discount  clerk  responsible? 
What  experience  does  the  j  unior  in  a  small  branch  receive  ? 


CHAPTER  IV 

BRANCH  BOOKS  AND  RECORDS 

1.  Bank  accounting. — The  tendency  of  modern 
accounting  is  to  adapt  the  books  to  a  business,  rather 
than  the  business  to  the  books,  and  this  practice  is 
particularly  noticeable  in  bank  bookkeeping.  Sys- 
tems and  devices  may  differ  among  banks,  and  even 
between  branches  of  the  same  bank,  but  the  basic 
principles  are  the  same.  Once  a  clear  understanding 
of  bank  bookkeeping  in  general  is  obtained,  there 
will  be  found  little  or  no  difficulty  in  mastering 
any  of  the  methods  or  systems  in  use  b^^  Canadian 
banks. 

To  grasp  thoroly  all  the  underlying  principles  of 
bank  accounting,  it  is  necessary  to  bear  in  mind  that 
practically  everything  handled  by  a  bank,  in  the  or- 
dinary course  of  its  business,  is  either  money  itself, 
or  a  written  claim  or  right  to  money.  Consequently 
the  cash  book  in  a  bank  is  the  principal  book,  and 
thru  its  pages  must  pass  a  record  of  eveiy  transaction 
made  by  the  bank,  either  in  detail  or  as  a  total  from 
a  supplemenary  book.  Thus  the  cash  book  gives  a 
bird's-eye  view  each  day  of  all  the  work  of  the  bank. 
Some  banks  still  use,  in  addition  to  the  cash  book,  a 

155 


156  BANKING  PRACTICE 

modified  form  of  the  old-fashioned  journal,  but  it  is 
preferable  to  make  the  cash  book  the  only  posting- 
medium  of  the  general  ledger. 

It  would  be  quite  possible  for  a  newly-opened 
branch  to  conduct  its  business  for  the  first  six  months 
or  so  with  the  aid  of  a  cash  book  and  a  ledger,  which 
would  serve  for  all  accounts.  A  collection  register 
would,  however,  soon  be  necessary. 

As  the  business  grew  it  would  be  found  convenient 
to  have  a  special  ledger  for  individual  accounts,  witli 
the  control  or  key  account  carried  in  the  original  led- 
ger, and  to  have  the  checks  and  deposits  entered  in  a 
supplementary  cash  book,  with  only  the  totals  entered 
in  the  general  cash  book.  Similarly,  it  would  be 
found  necessary  in  time  to  open  up  a  discount  regis- 
ter and  a  liabilitj"  ledger  to  look  after  the  increased 
number  of  loans. 

As  the  volume  of  business  increases,  the  deposit 
ledger  is  capable  of  being  indefinitely  subdivided, 
either  alphabetically  or  numerically.  Generally,  tlie 
ordinary  deposit  ledger  is  divided  alphabetically  and 
the  savings  bank  ledger  numerically. 

From  the  above  it  will  be  noticed  that  bank  book- 
keeping, altho  based  primarily  on  the  cash  book  and 
ledger,  is  susceptible  of  indefinite  expansion  in  any 
direction  to  meet  increased  volume  of  business  or 
other  local  exigencies. 

2.  Books  of  a  branch. — The  books  in  use  at  even 
a  moderately  sized  office  generally  include  those  given 
in  the  following  list: 


BRANCH  RECORDS  157 

Books  of  Original  Entry 
Cash  Book. 
Figure    6.     Cash   Book,   supplementary. 

7.  Discount  Register. 

8.  Discount  Blotter. 

9.  Discount  Diary,  local  bills. 
10-11.     Discount  Diary,  remitted  bills. 
12-13.     Draft  Register. 

14?-15.  Checks  Remitted  Register. 

16.  Sight  Item  Register. 

17.  Remittance  Book  ("Red"  book). 

18.  Branch  Clearings  Statement. 

Teller's  Books 

Teller's  Blotter. 
Fiffure  21.      Teller's  Cash  Statement. 
Money  Parcels  Received. 
Money  Parcels  Despatched. 

Books  of  Summary 

General  Ledger. 
Figure  23.     Deposit  Ledger. 

24.  Savings  Deposit  Ledger. 

25.  Liability  Ledger. 

26.  Blue  Books  (Trade  Paper). 

Fiduciary  Books 
Figure  27.      Collection  Register. 
Collection  Diary. 
28.     Collateral  Register. 

Statistical  Books,  etc. 

General  Statement  Book. 

Financial  Statement  Book. 

Letters  Received  Register. 

Postage  or  Letters  Despatched  Book. 

Past  Due  Bill  Register. 

Warehouse  Receipt  or  Produce  Book. 

Pro  Forma  Stationery  Book. 


158  BANKING  PRACTICE 

Register  of  Powers  of  Attorney. 
Register  of  Waivers,  Etc. 
Overdraft  Register. 
Expense  Book. 
Discrepancy'  Book. 
Treasury  Book. 

This  list  may  appear  formidable  but  it  is  intention- 
ally comprehensive.  A  small  branch  would  require 
only  half  this  number;  the  fewer  books  used  in  an 
office  the  better.  New  books  or  sub-divisions  of 
books  should  be  introduced  only  when  the  work  on 
the  original  book  becomes  congested.  A  ledger,  for 
instance,  should  be  subdivided  only  when  the  posting 
and  references  become  too  heavy  for  one  clerk  to  do, 
and  when,  in  consequence,  the  work  of  the  office  is 
delayed.  jNIethod,  simplicity  and  concentration  are 
the  foundations  of  an  efficiently  managed  office. 

Books  should  be  uniform  in  size  as  far  as  possible ; 
thickness  and  weight  should  be  avoided.  Two  or 
three  standard  sizes  should  be  established  and  com- 
plied with.  Uniformity  in  size  and  position  of  post 
holes  is  particularly  advantageous  in  the  loose-leaf 
system,  as  the  binders  are  then  not  only  interchange- 
able, but  one  binder  can  be  used  for  several  different 
forms. 

Attention  should  be  paid  to  the  ruling,  with  a  view 
to  uniformity.  One  inch  and  a  quarter  is  ample 
width  for  the  average  money  column,  with  a  hair  line 
dividing  the  thousands — allow  five-sixteenths  of  an 
inch  for  the  cents  and,  say,  seven-sixteenths  for  the 
thousands.     One-half  to  three-quarters  of  an  inch  is 


BRANCH  RECORDS  159 

sufficient  for  discount,  exchange,  date  columns,  etc. 
As  regards  the  width  between  the  horizontal  lines, 
one-quarter  of  an  inch  is  a  good  average.  In  books 
where  the  entries  are  extended  across  a  number  of 
columns,  every  fifth  horizontal  line  should  be  of  a 
color  different  from  the  regular  ruling,  to  serve  as  a 
guide  line.  Books  or  forms  intended  for  use  with 
an  adding  machine,  if  ruled,  should  be  spaced  accord- 
ing to  the  mechanical  spacing  of  the  machines  used. 

In  the  sample  forms  given  in  this  chapter  no  at- 
tempt is  made  to  preserve  the  correct  proportion  of 
the  various  columns;  to  do  so  would  occupy  too  much 
space.  These  forms  have  no  particular  claim  to  merit 
except  that  they  have  been  in  satisfactory  use  for 
years  in  different  banks.  They  are  general  rather 
than  specific,  and  will,  it  is  hoped,  be  suggestive  as 
well  as  directly  useful. 

3.  Loose-leaf  accounting. — The  vast  increase  in  the 
number  and  volume  of  commercial  transactions  dur- 
ing the  past  twenty  years  has  made  the  use  of  loose- 
leaf  ledgers  and  other  books  a  practical  necessity  in 
modern  accounting.  In  Canadian  banks,  particu- 
larly, the  system  has  been  in  successful  operation  for 
many  years.  The  principal  objection  urged  against 
loose-leaf  ledgers — the  question  of  their  validity  in  a 
court  of  law — appears  to  have  died  a  natural  death. 
The  courts  rule  so  plainly  and  the  logic  is  so  clear, 
that  it  is  the  original  entry  that  counts  and  not  the 
assembly  of  entries  in  the  ledger,  that  it  is  now  gen- 
erally conceded  that  the  loose-leaf  ledger  is  just  as 


160  BANKING  PRACTICE 

acceptable  as  evidence  in  a  court  as  a  bound  ledger. 
In  fact,  with  the  precautions  observed  by  the  banks 
in  their  use  of  loose-leaf  books,  the  evidence  mioht 
be  considered  even  more  competent.  The  following- 
rules  are  generally  observed: 

1.  The  keys  of  all  loose-leaf  ledgers  and  transfer  binders 
are  kept  in  the  custody  of  the  manager  or  of  the  accountant 
or  other  officer  specially  authorized,  by  whom  blank  sheets 
are  inserted  as  required,  and  the  used  sheets  removed  and 
filed  in  the  transfer  binder. 

2.  After  removing  the  sheets,  the  officer  who  has  custody 
of  the  key  must  place  a  paper  seal  bearing  his  signature  in 
the  sealing  device  on  the  front  of  the  ledger,  and,  when  open- 
ing the  book  again,  must  satisfy  himself  that  his  last  seal 
has  not  been  tampered  with. 

3.  A  separate  sheet  must  be  used  for  each  account,  and 
each  sheet  must  be  signed  in  the  upper  right-hand  corner  b}' 
the  manager  or  accountant  when  the  first  entry  is  made. 
The  officer  who  signs  the  sheet  must  see  that  the  account  is 
properly  indexed. 

4.  A  few  blank  sheets  may  be  locked  in  the  current  ledger 
for  emergency  use,  but  all  others  must  be  kept  under  lock 
in  the  custody  of  the  officer  who  holds  the  key  of  the  ledger. 

Bound  books  have  not  prevented  manipulation  and 
fraud,  and  the  above  precautions  combined  with  the 
comprehensive  checking  system  of  a  bank  should 
practically  eliminate  the  danger  of  fraudulent  substi- 
tution of  pages.  If  a  man  is  determined  to  be  dis- 
honest there  are  easier  and  less  evident  methods  of 
defrauding  than  by  switching  ledger  leaves. 

4.  Cash  book. — This  book  contains  a  record  of  all 
the  vouchers  and  entries  representing  the  transac- 
tions of  each  day.     Theoretically,  the  particulars  of 


BRANCH  RECORDS  161 

every  item  in  the  cash  book  should  be  entered  in  de- 
tail, but  owing  to  the  wide  extension  of  banking  fa- 
cilities and  the  constantly  increasing  volume  of  checks 
and  other  entries,  it  has  been  found  necessary  to  use 
supplementary  books  for  recording  particulars  of  any 
class  of  items  whose  volume  is  sufficient  to  warrant  a 
separate  book — only  the  day's  totals  are  carried  into 
the  general  cash  book.  The  majority  of  entries,  es- 
pecially in  a  large  office,  are  therefore  in  the  form  of 
totals,  and  very  few  detailed  entries  have  to  be  made ; 
but  all  entries,  when  made,  should  be  definite  as  to 
source  and  sufficiently  self-explanatory  to  be  under- 
stood by  any  one  at  any  time — ten  years  after,  if  nec- 
essary. 

In  the  larger  offices,  the  officers  in  charge  of  the  dif- 
ferent departments  after  balancing  their  books  hand 
to  the  cash-book  clerk  the  totals  in  the  form  of  a 
signed  memorandum,  and  even  in  the  smaller  offices 
it  is  advisable  to  have  the  clerks  entering  up  the  vari- 
ous supj^lementary  books,  give  a  similar  memoran- 
dum of  their  totals.  This  limits  the  responsibility 
and  adds  to  the  efficiency  of  the  staff. 

Debit  and  credit  entries  for  casli  book,  other  than 
the  totals  referred  to  above,  are  represented  by  vouch- 
ers giving  the  necessary  particulars,  signed  by  the 
manager,  accountant  or  other  authorized  officer,  and  it 
should  be  an  imperative  rule  that  any  slip,  wliich  does 
not  contain  sufficient  particulars  or  which  lacks  the 
necessary  signature,  should  be  refused  by  the  casli- 
book  clerk  and  referred  back  to  the  teller  for  comple- 

XVI— 12 


16a  BANKING  PRACTICE 

tion.  In  order  to  facilitate  the  sorting  and  cheek- 
ing of  these  vouchers,  distinctive  colored  paper  or 
printing  should  be  used;  for  instance,  yellow,  debit 
slips  and  white,  credit  slips. 

It  should  constantly  be  borne  in  mind  that  as  the 
cash  book  and  its  supplementary  books  are  recognized 
in  a  court  of  law  as  the  books  of  original  entry,  faulty 
or  meager  particulars  might  cause  serious  trouble. 
Verbal  explanation,  even  if  available,  would  not  be 
admitted.  Examine  a  bank  cash  book  of  twenty  or 
thirty  years  ago:  there  could  be  no  better  object  lesson 
of  what  a  cash  book  should  be.  Copper-plate  writing 
and  ample  particulars  are  characteristic. 

5.  Writing  up  the  cash  book. — Many  labor-saving 
and  ingenious  rulings  are  to  be  found  among  the 
books  of  banks,  and  improvements  are  constantly  be- 
ing devised  and  adopted.  The  most  essential  book 
however,  the  cash  book,  remains  practically  un- 
changed, and  is  simply  an  ordinary  commercial  cash 
book  with  two  or  three  money  columns,  a  space  for 
date  and  particulars,  and  Avith  no  printed  headings. 
The  columnar  cash  book  is  not  adapted  to  bank  work 
and  it  has  never  found  favor. 

6.  Supplementary  cash  book. — In  this  book  are 
entered  all  the  deposit  slips,  checks,  and  other  vouch- 
ers pertaining  to  the  ordinary  deposit  and  savings 
bank  ledgers.  The  ruling  is  simple,  requiring  no 
printed  headings,  and  consists  of  columns  for  folio, 
names  of  customers  and  amount  of  vouchers — two  sets 
of  columns  to  a  page.     Two  pages  will  easily  contain 


BRANCH  RECORDS  163 

a  day's  entries  for  a  small  branch,  the  first  or  left- 
hand  column  being  used  for  deposits  and  the  remain- 
ing three  for  checks,  the  latter  being  much  more  nu- 
merous. The  savings  deposits  and  checks,  being  com- 
paratively few  in  number,  are  entered  at  the  end  of 
the  day  under  their  own  headings  at  the  foot  of  the 
ordinary  checks  and  deposits  respectively,  tho  in  some 
small  branches  they  are  entered  in  the  general  cash 
book. 

In  offices  where  it  is  found  necessary  to  split  up  the 
deposit  ledger  into  two  or  more  alphabetical  divisions, 
a  special  "supplementary"  is  devoted  to  each  division 
including  the  savings  bank  ledger.  It  is  not  neces- 
sary to  open  up  an  account  in  the'  general  ledger  for 
each  division  of  the  deposit  ledgers. 

If  the  savings  ledger  contains  a  large  number  of 
accounts,  it  will  be  found  of  great  advantage  to  split 
it  up  into  several  sections  or  blocks  of  accounts,  as 
this  greatly  facilitates  the  location  of  errors  when 
balancing.  A  special  form  of  supplementary  cash 
book  should  be  used  with  a  money  column  for  each 
block  of  accounts. 

In  the  case  of  a  current  account  which  has  an  un- 
usual number  of  checks  at  a  certain  period  of  the 
month  or  year — for  instance,  payroll  or  dividend 
checks — it  is  permissible  to  detail  a  day's  checks  once, 
either  in  the  supplementary  cash  book  or  ledger,  and 
enter  the  total  only  with  a  reference  in  the  other  book. 

In  the  larger  offices  of  some  of  the  banks,  where  the 
volume  of  checks  is  unusually  heavy,  a  loose-leaf  form 


164  BANKING  PRACTICE 

of  supplementary  cash  book  is  used  in  connection 
with  tlie  adding  machine,  the  names  being  typewrit- 
ten in  afterward.  Where  this  form  is  adopted,  care 
should  be  taken  to  see  that  the  sheets  are  consecu- 
tively numbered  and  filed,  and  that  each  sheet  is 
signed  by  the  two  checking  officers. 

7.  Discount  register. — In  this  book,  as  its  name  im- 
plies, are  entered  all  the  notes  and  bills  discounted  by 
a  branch.  The  book  is  ruled  so  as  to  provide  space 
for  a  full  description  of  every  item,  and  the  notes  are 
entered  and  numbered  consecutively.  Two  or  more 
lines  can  be  used  where  a  note  has  nmnerous  obligants, 
or  when  the  description  of  the  security  is  lengthy.  A 
form  in  common  use  is  shown  in  Figure  7.  The  head- 
ings are  self-explanatoiy  with  the  exception  perhaps 
of  the  last  two — loans  and  trade  bills. 

Loans  comprise  all  the  advances  made  to  a  borrower 
on  his  own  name  and  consist  principally  of  the  fol- 
lowing classes : 

(a)  Advances  made  on  the  name  of  the  borrower 
alone ; 

(b)  Advances  secured  by  one  or  more  indorsers; 

(c)  Advances  secured  by  produce,  stocks  and 
bonds,  notes  and  other  collateral  securities. 

Trade  bills  represent  settlements  for  actual  goods 
sold,  and  are  only  offered  by  the  party  who  has  dis- 
posed of  the  goods.  They  may  consist  of  either 
drafts  or  notes. 

The  last,  or  remark  column,  is  used  to  denote  the 
<lomicil  of  a  trade  bill  when  it  is  payable  at  an  outside 


g  CO 

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Plscount 
and 

Interest 

Rate 
per 
cent. 

Dato 
of 

Note 

2 

o 

Endorser 

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re 

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5*; 

166  BANKING  PRACTICE 

point.  It  is  also  used  for  any  special  memorandum 
regarding  renewals,  and  the  like.  Some  banks  have 
an  additional  column  for  proceeds  in  their  discount 
register. 

As  already  stated,  all  notes  and  bills  are  entered  and 
numbered  consecutively.  The  loans  and  local  trade 
bills  are  then  entered  in  the  diary  and  taken  over, 
checked  and  initialed  by  the  manager  daily,  or  at 
least  twice  a  week.  The  other  trade  bills  are  entered 
in  the  trade-bills-remitted  diary  and  initialed  by  the 
mailing  officer. 

8.  Discount  blotter. — This  book  is  a  valuable  ad- 
junct to  the  discount  register  and  an  excellent  form 
is  shown  in  Figure  8.  In  this  book  are  entered  the 
net  total  proceeds  of  the  discounts  to  be  credited  to  the 
various  customers,  also  the  amount  of  interest  and  ex- 
change collected.  If  more  than  one  deposit  ledger  is 
used,  a  column  is  provided  for  each  ledger.  These 
entries  are  made  from  the  discount  deposit  slips  or 
lists  which  are  then  passed  on  to  the  ledger-keeper 
who  posts  the  net  proceeds  to  the  credit  of  the  various 
customers  in  the  ledger,  marking  the  abbreviation 
"disct"  opposite  each  entry. 

In  the  case  of  casual  or  transient  notes  discounted 
for  customers  who  have  no  deposit  accounts,  a  special 
form  of  receipt  is  used  which,  when  signed  by  the  ob- 
ligant,  is  cashed  by  the  teller  and  charged  to  an  ac- 
count called  "petty  discounts"  in  the  deposit  ledger. 
The  offsetting  credits  are  entered  in  detail  in  the  last 
column  of  the  blotter,  extended  at  the  end  of  the  day 


BRANCH  RECORDS  167 

into  the  ledger  column  and  posted  in  one  amount  to 
the  account. 

When  the  day's  work  is  balanced,  the  interest,  ex- 
change, and  ledger  columns  will  agree  with  the  total 
of  the  loans  and  trade  bills  in  the  discount  register. 
The  total  for  the  deposit  ledger  is  included  in  the  total 
of  the  supplementary  cash  book  for  the  day,  and  the 
balancing  entries  are  passed  thru  the  general  cash 
book. 

The  entries  in  the  blotter  are  called  off  with  the 
deposit  ledger  daily. 

9.  Discount  diary. — Figure  9  shows  a  useful  form 
of  diarj^  for  loans  and  local  trade  bills  maturing,  a 
page  or  part  of  a  page  being  given  to  each  day  of  the 
year.  As  each  day's  bills  mature  the  notes  are  taken 
over  and  initialed  by  the  teller,  a  line  being  drawn 
across  the  money  columns,  and  the  loans  and  trade 
bills  for  the  day  totaled.  At  the  end  of  the  day  the 
unpaid  items  are  extended  into  the  past  due  column 
for  debit  to  past  due  bills  account,  and  the  entries 
passed  thru  the  teller's  blotter,  whose  "Notes  paid" 
column  should  balance  with  the  total  of  the  credits  to 
loans  and  trade  bills. 

Any  notes  paid  before  maturity  are  marked  off  the 
diary  on  the  day  due,  entered  below  the  dividing- 
line  of  the  day's  notes  and  added  to  the  total.  Simi- 
larly any  past  due  bills  should  be  marked  off  and  en- 
tered in  the  column  provided,  all  entries  below  the 
line  in  this  column  being  considered  credits. 

The  column  for  interest  can  be  used  for  a  record  of 


16S 


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BRANCH  RECORDS  169 

any  interest  collected  which  is  not  entered  in  the  reg- 
ister, such  as  interest  on  past  dues,  demand  notes,  etc. 
The  diary  sheet  of  the  day  will  afford,  therefore,  a 
complete  record  of  all  payments  made  to  the  discount 
department. 

10.  Trade  bills  remitted  diary. — Only  in  the  very 
large  offices  is  it  necessary  to  have  a  separate  book  for 
this  diary.  In  the  ordinary  branch,  the  ruling  given 
in  Figure  10  appears  at  the  foot  of  the  discount  diary. 
At  the  end  of  each  day  the  total  is  credited  to  trade 
bills  remitted  and  debited  to  cash  items  account,  there 
to  await  the  relative  remittances,  credits,  etc.,  when 
the  items  are  duly  marked  off  as  either  paid  or  re- 
turned. 

Considerable  space  is  wasted  in  connection  with  this 
daily  diary,  and  a  weekly  diary,  as  shown  in  Figure 
11,  has  been  used  to  advantage.  Four  sheets  to  the 
month  are  used,  covering  1st  to  8th,  9th  to  15th,  16th 
to  23d,  and  24th  to  the  end  of  the  month,  and  are  filed 
in  their  chronological  order  in  the  discount  diary,  a 
different  colored  paper  being  used  to  distinguish 
them.  The  bills  are  entered  in  consecutive  order  ac- 
cording to  maturity  on  these  weekly  sheets.  On  the 
second  day  of  each  w^eek,  say  on  August  2,  for  the 
week  of  August  1  to  8,  the  total  for  the  week  is  cred- 
ited to  trade  bills  and  debited  to  cash  items  account, 
and  the  sheet  handed  to  the  cashbook  man  to  be 
marked  off  as  the  items  are  accounted  for. 

11.  Drafts  register. — The  first  form  given  in  Fig- 
ure 12  is  for  drafts  drawn  on  foreign  correspondents. 


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BRANCH  RECORDS  171 

These  generally  have  to  be  covered  by  remittances  or 
credits  to  another  branch  or  correspondent.  Great 
care  should  be  taken  to  see  that  the  draft  is  prop- 
erly made  out,  signed,  advised  and  remitted  for  cor- 
rectly. 

Figure  13  is  the  register  for  drafts  drawn  on  other 
branches.  The  total  for  the  day  is  credited  to  an  ac- 
count in  the  general  ledger  called  di'aft  account. 
After  payment  the  draft  is  returned  by  the  drawee 
branch  at  debit,  is  marked  off  with  the  dating  stamp, 
listed  with  other  paid  drafts  in  the  right-hand  column, 
and  at  the  end  of  the  day  this  total  is  debited  to  the 
draft  account.  The  items  unmarked  at  any  time  will 
be  outstanding,  and  their  total  will  balance  with  the 
draft  account  in  the  general  ledger. 

12.  Check  lists. — All  debits  between  branches,  in- 
cluding checks,  drafts  and  money  orders  paid,  and 
the  like,  are  listed  on  a  special  form  called  a  check 
list,  and  debited  in  one  total  to  branch  clearings  ac- 
count and  the  list  forwarded  direct.  The  receiving 
branch  gives  credit  on  the  branch  clearings  statement 
immediately  on  receipt.  Even  if  an  item  has  to  be 
returned  or  there  is  an  error  in  the  addition  of  a  list, 
the  amount  as  shown  must  be  credited  exactly,  and 
the  difference  adjusted  on  "At  Credit"  advice  or  a 
return  check  list,  as  the  case  may  be.  Check  lists  are 
of  different  forms  and  sizes,  but  are  invariably  in 
duplicate,  the  carbon  copy  being  retained  as  a  record. 
In  the  larger  branches  the  lists  are  on  loose  sheets  of 
one,  two  or  three  lists  each,  for  use  with  the  type- 


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BRANCH  RECORDS  173 

writer  or  adding  machine,  the  carbon  copies  being 
filed  in  a  binder  for  reference.  Figure  14  is  a  com- 
mon form. 

In  the  smaller  branches  the  lists  are  in  bound  form, 
generally  two  large  and  four  small  lists  to  a  page, 
Figure  15.  At  the  end  of  the  day  all  lists  for  other 
branches  are  debited  in  the  branch  clearings  state- 
ment, and  only  in  case  of  loss  or  delay  in  transit  will 
the  copies  be  referred  to. 

Check  lists  sent  to  correspondents  are  entered  and 
filed  similarly,  with  the  exception  that  they  are  deb- 
ited to  the  head  oflfice  in  the  branch  clearings  state- 
ment. 

Originally,  check  lists  were  debited  to  cash  items 
account  until  due  advice  of  payment  was  received  on 
"At  credit"  advice.  The  best  practice  now  is  to  debit 
the  lists  direct  to  branch  clearings  account.  No  item 
is  more  promptly  responded  to  than  a  check  list,  and 
much  time  and  postage  are  saved  by  the  elimination 
of  the  advice. 

13.  Cash  items. — All  debits  originating  at  a  branch 
against  other  branches,  with  the  exception  of  check 
lists,  are  debited  to  an  account  in  the  general  ledger 
called  "cash  items"  account  or  "short  date  draft"  ac- 
count.    These  debits  may  consist  of  the  following: 

(a)  Demand  and  sight  drafts  received  from  cus- 
tomers as  cash,  the  currency  of  which  is  not  likelj-  to 
exceed  one  week; 

(b)  Coupons  and  other  items  requiring  special  ad- 
vice or  attention; 


THE  CANADIAN  BANK  OF  COMMERCE 

ShERBROOKE,  CUE. 

All  Items  marked X and  those  under  flOno  protest 

Wire  Non-Payment  of  Items  S500  or  over  unless  otherwise  stated. 


Date- 


Payer 


Figure  14.     Check  List 


WHEN  CREDITING THESEITEMS  GIVE  DATE                                                   C.K.List 

THE  CANADIAN  BANK  OF  COMMERCE 

191 

1 

WE  ENCLOSE  FOR  CREDIT  OR  REMITTANCE  ITEMS  AS  LISTED  BELOW                                                  | 

_     . 1 

Figure  15.     Check  List 
174 


BRANCH  RECORDS 


175 


(c)  Remitted  discounts  as  debited  each  day  from 
the  diary.  These  include  bills  held  by  correspond- 
ents as  well  as  by  branches. 

This  account  shoidd  be  drawn  off  weekly  and  bal- 
anced with  the  general  ledger.  Any  item  outstand- 
ing an  undue  length  of  time  should  be  promptly  in- 
quired about  or  "fated" — to  use  an  office  term. 


WHEN  CHEDITINQ  OR  REMITTING  FOR   w    p,                                                   N. 
THESE  ITEM8  DESCRIBE  BY  THE  NO.      ^*  ^*                                                        \^ 

THE  CANADIAN  BANK  OF  COMMERCE                          \^ 

WE  ENCLOSE  FOR  CREDIT  OR  REMITTANCE  ITEMS  AS  LISTED  BELOVn 

Manager 

Figure  16.     Cash  or  Short  Date  Draft  Account 


Figure  16  is  a  common  form,  combining  a  record 
and  a  letter,  bound  six  or  eight  to  a  page,  a  carbon 
copy  being  retained  as  the  record. 

14.  Remittance  book. — This  book  was  originally 
used  simply  to  record  the  remittances   from  other 


«o 


I  2 

u    u 


176 


BRANCH  RECORDS  177 

banks  and  the  distribution  of  the  proceeds;  but  it 
gradually  developed  into  a  general  sorting-out  book 
for  the  cash  book,  and  is  particularly  useful  in  con- 
nection with  the  mail  work.  All  credits  for  cash 
items  account  should  be  entered  here  and,  if  possible, 
all  the  entries  for  branch  clearings  account,  in  order 
to  form  a  check  on  the  completed  statement.  The 
ruling  and  headings  vary  in  different  banks,  but  a 
good  form  is  shown  in  Figure  17. 

The  bulk  of  the  entries  for  this  book  arrive  in  the 
morning  mail. 

Returned  cash  items  are  also  entered  in  this  book, 
being  credited  in  the  cash  items  column  and  debited  in 
the  sundry  column  to  the  indorsers,  only  the  totals 
being  handed  to  the  teller. 

This  book  is  most  useful  in  sorting  out  and  block- 
ing the  work. 

15.  Branch  clearing  statement. — In  a  branch  sys- 
tem there  must,  of  necessity,  arise  each  day  numerous 
entries  between  the  branches  themselves,  and  between 
the  branches  and  the  head  office.  Direct  accounts  be- 
tween branches  are  out  of  the  question,  and  separate 
accounts  with  the  head  office  are  cumbersome,  especial- 
ly when  the  branches  are  at  all  numerous.  The  most 
satisfactory  method  in  use  is  what  is  known  as  the 
branch  clearing  system.  This  is  a  simple  and  ingenious 
system  which  makes  the  head  office  the  clearing  house 
for  all  inter-branch  transactions.  The  medium  is  a 
statement  called  the  branch  clearing  statement  which 
is  sent  to  the  head  office  daily  by  each  branch,  and  on 

XVI— 13 


Account 

No, 


-191- 


BRANCH  CLEARINGS  ACCOUNT 


Date 
of  List 


Branch 


"At  Credit" 
advices  received 


Check.  Uats  sent 


Head  Office 
(debits  to) 


Total. 
Balance  _ 


Check  lists 
received 


"At  Credit" 
advices  sent 


Head  Office 
(credits  to) 


Total. 
Balance- 


I   have  compared  the  above  en- 
tries  with   the   relative    At   Credit 
slips,  checked  the  summations,  and 
have  compared  the  balances  shown 
with    the    figures    of   the    General 
Ledger. 
The  balance  to  be  carried  forward 
from     this     account     should     be 
written    on    a    lower    line    than 
that  on  which  the  balance  from 
the  previous  day  is  given. 

Accountant 

Extreme  care  must  be  taken  to  avoid  errors  of  any  kind  in  this  Return 

Figure  18 
178 


BRANCH  RECORDS  179 

which   are   entered   all   transactions   with   the   other 
branches  and  with  the  head  office.     (See  Figure  18.) 

So  far  as  possible,  the  entries  passing  thru  branch 
clearings  account  consist  of  totals  only.  No  particu- 
lars are  necessaiy  except  the  name  or  number  of  the 
branch  credited  or  debited. 

Check  lists  originate  as  debits  and  are  responded  to 
b}'-  credits.  "At  credit"  advice  slips  originate  as  cred- 
its and  are  responded  to  by  debits.  Head  office  en- 
tries, both  debit  and  credit,  originate  at  the  branches. 

All  entries  for  the  statement  should  be  systematic- 
ally arranged  both  as  to  classification  and  the  order  of 
the  branches.  At  the  end  of  the  day  the  branch  clear- 
ings statement  is  added  and  the  totals,  debit  and 
credit  entered  in  the  cash  book.  The  statement  is 
then  balanced  with  the  general  ledger  by  the  addition 
of  the  day's  balance,  carefully  checked,  and  forwarded 
to  the  head  office  the  following  day.  No  change 
is  permissible  in  the  entries.  They  must  be  credited 
or  debited  to  the  statement  exactly  as  received.  Er- 
rors in  check  lists  or  advices  must  be  corrected  by  the 
creation  of  separate  entries. 

16.  ''At  credit"  advices. — With  the  exception  of 
check  lists,  no  branch  debits  another  branch  in  this 
statement  without  first  receiving  an  advice  on  an  "At 
credit"  slip.      (See  Figure  19.) 

All  other  items  collected  by  one  branch  for  another 
during  a  day  are  entered  on  an  "At  credit"  slip,  the 
total  of  which  is  credited  on  the  branch  clearings 
statement  against  the  name  of  the  branch  interested. 


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BRANCH  RECORDS  '    181 

and  the  advice  is  then  mailed  direct  to  the  latter,  a 
carbon  copy  being  retained  for  record.  Immedi- 
ately on  receipt  of  the  advice  the  total  amount  is  deb- 
ited in  branch  clearings  against  the  name  of  the  ad- 
vising branch,  and  the  items  credited  to  their  several 
destinations.  The  credit  entry  is  thus  offset  and 
ticked  off  in  due  course  at  the  head  office.  Some  of- 
fices will,  of  course,  require  the  use  of  a  much  larger 
advice  slip  than  the  form  shown. 

Two  columns  will  be  noticed  in  the  advice.  The 
first  column  is  used  for  debits  already  created  at  the 
credited  branch,  which  await  the  relative  credits  in 
"Cash  items  account." 

The  second  column  is  used  to  advise  all  other  credits 
such  as  collections,  deposits,  collaterals,  trade  bills 
paid  out  of  date,  and  other  similar  items. 

Cash  items  consist  principally  of  sight  items  and 
matured  trade  bills,  and  these,  on  the  receipt  of  the 
advice,  are  marked  off  as  paid,  and  the  first  column 
of  the  advice  credited  to  the  account  as  a  total. 

17.  Head  office  entries. — Head  office  entries,  both 
debit  and  credit,  originate  with  the  branches  in  every 
case.  The  entries  can  be  made  either  in  red  ink  at  the 
foot  of  the  branch  clearings  statement,  or  else  entered 
on  a  special  form  in  detail,  and  only  the  totals  entered, 
into  the  statement.  Figiu'e  20  is  comprehensive  and 
allows  for  an  analysis  of  the  contents  of  all  money  per- 
cels  debited.  All  debits  and  credits  on  correspondents 
originating  at  the  branches,  are  passed  thru  the  head 
office   account.     Lists   of  dividend   warrants,   profit 


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BRANCH  RECORDS  183 

and  loss  entries,  expense  checks  and  other  head  office 
matters  are  all  entered  here. 

18.  Business  with  other  banks. — Transactions  be- 
tween Canadian  banks  are  generally  effected  thru 
the  daily  clearing,  and  very  seldom  thru  the  medium 
of  an  account.  Foreign  correspondents  generally 
carry  a  deposit  account  at  one  of  the  large  offices  to 
which  any  collections  made  for  them  by  any  of  the 
branches  are  credited  or  drafts  drawn  debited.  ]Most 
accounts  with  correspondents,  however,  are  more  con- 
veniently carried  at  the  head  office;  all  debits  and 
credits  originating  with  the  branches  being  advised 
thru  the  branch  clearings  account.  Daily  statements 
from  the  correspondents  give  the  responding  entries, 
and  the  accounts  are  kept  in  constant  adjustment. 
Not  only  does  this  concentration  at  the  head  office  sim- 
plify the  bookkeeping,  but,  as  the  balances  with  cor- 
respondents frequently  form  an  important  part  of  a 
bank's  reserve,  it  enables  the  head  office  to  control  the 
balances  accordingly. 

19.  Teller's  records. — The  teller's  cash  book  or  blot- 
ter consists  of  a  skeleton  ruling  with  no  printed  head- 
ings, these  being  written  in  daily  by  the  teller  accord- 
ing to  his  requirements.  Were  the  headings  printed 
it  would  require  a  specially  printed  book  for  each 
class  of  teller,  and  even  then  it  might  not  be  suitably 
spaced  for  local  requirements. 

A  teller  should  arrange  his  entries,  debit  and  credit 
to  conform  with  the  general  system  of  the  office. 
Checks  should  be  sorted  out  and  entered  according  to 


184  BANKING  PRACTICE 

the  divisions  of  the  ledger,  thus  balancing  with  the 
various  supplementaries.  If  the  checks  are  very- 
numerous,  separate  sheets,  suitably  ruled,  can  be  used; 
these  can  be  entered  on  an  adding  machine  or  by  an 
assistant. 

A  teller's  book  is,  in  realitj^  a  skeleton  cash  book, 
and  the  entries  should  be  so  arranged  that  the  books 
of  the  various  departments  should  balance  with  the 
combined  entries  of  the  tellers. 

Figure  21  is  used  at  the  end  of  the  day  as  a  balance 
book  and  record  of  cash  in  hand ;  it  is  self-explanatory. 

All  parcels  of  money  received  are  acknowledged, 
and  entered  in  a  special  book.  If  the  advice  comes 
in  first  it  should  be  at  once  entered  in  this  book,  and 
the  parcel  inquired  for  if  necessary.  Money  parcels 
dispatclied  are  also  entered  in  a  book.  Great  care  is 
necessary  in  handling  money  parcels.  Both  sent  and 
received  parcels  should  be  counted  by  two  men  in  each 
other's  presence  and,  in  the  case  of  the  former,  it  is 
necessary  to  have  the  parcel  in  the  uninterrupted 
custody  of  two  men  from  the  time  it  is  counted  and 
sealed  until  it  is  delivered  to  the  express  company  or 
post  office. 

The  relative  advices  and  acknowledgments  should 
be  carefully  watched  and  any  delay  immediately  in- 
quired into. 

20.  General  ledger. — The  general  ledger,  next  to 
the  cash  book,  is  the  most  important  book  in  a  branch ; 
in  fact  it  is  equally  important,  tho  in  a  different  sense. 
The  cash  book  is  the  book  of  original  entry,  and  con- 


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186  BANKING  PRACTICE 

tains  a  chronological  record  of  all  the  transactions  of 
a  branch.  The  general  ledger  contains  the  summary 
or  analysis  of  these  transactions  under  the  various 
headings,  while  its  subsidiary  books,  the  deposit  and 
liability  ledgers,  summarize  the  amount  due  to  or 
from  individuals  respectively.  The  general  ledger 
is  posted  every  day  from  the  cash  book,  and  contains 
all  accounts  necessary  to  show  the  position  of  a  branch 
with  regard  to  the  business  done  under  the  various 
classifications  called  for  by  the  government  statement. 
As  a  matter  of  fact,  however,  the  accounts  kept  in  the 
average  branch  ledger  are  not  very  numerous  and  con- 
sist broadly  of: 

Assets — cash,  loans: 

Liabilities — liabilities  to  the  public; 

Office  Accounts — profit  and  loss,  branch  clear- 
ings, etc. 

The  profit  and  loss  and  branch  clearings  accounts 
are  internal  accounts,  and  may  be  either  debit  or 
credit.  The  latter  is  the  adjusting  account  of  the 
branch  with  the  bank  as  a  whole,  and  varies  approxi- 
mately with  the  difference  between  its  loans  and  de- 
posits, as  every  branch  either  suppHes  funds  to  the 
head  office  or  the  reverse. 

Loans  are  generally  carried  under  two  headings, 
loans  and  trade-bills,  tho  in  a  large  city  office  they  are 
frequently  sub-divided  into  half  a  dozen  accounts. 
This  is  merely  a  matter  of  convenience,  however.  In 
the  same  way  the  liabilities  are  divided  into  ordinary 
and  interest-bearing  deposits,  etc.     The  form  most 


BRANCH  RECORDS  187 

generally  used  is  similar  in  ruling  to  the  current  de- 
posit ledger  ( Figure  22 ) ,  with  wider  money  columns 
and  more  space  for  particulars. 

21.  Current  deposit  ledger. — The  ordinary  or  cur- 
rent deposit  ledger  is  a  very  active  and  important 
book  in  a  bank,  and  one  which  calls  for  both  accuracy 
and  dispatch  on  the  part  of  the  clerk  in  charge,  as 
errors  can  easily  be  made,  involving  the  bank  in  seri- 
ous loss.  The  deposit  ledger  is  invariably  a  loose- 
leaf  book  and  ruled  as  shown  in  Figin-e  22.  This 
form  is  invariably  used  by  all  the  banks.  The  so- 
called  Boston  ledger  has  been  tried  several  times,  but 
was  not  found  practicable  in  Canada,  owing  perhaps 
to  the  method  of  marking  or  accepting  checks  by  a 
direct  debit  to  the  account.  The  accounts  are  ar- 
ranged alphabetically,  and  are  therefore  self-index- 
ing, but  an  index  is  usually  kept  on  the  tagged  sheet 
dividing  the  alphabet. 

In  small  offices  there  is  usually  only  one  current 
ledger  used,  A-Z.  As  work  increases  and  becomes 
too  much  for  one  ledger-keeper,  a  second  ledger  can 
can  be  opened  divided  A-K  and  L-Z.  For  three 
ledgers  the  divisions  generally  run  A-G,  H-O,  and 
P-Z,  and  for  four  the  divisions  are  A-C,  D-K,  L-R 
and  S-Z. 

As  the  ledger  is  loose-leaf  there  is  no  accumula- 
tion of  dead  leaves,  but  the  general  regulations  re- 
garding loose-leaf  ledgers  given  in  Section  3  of  this 
chapter  should  be  observed  closely. 

The  posting  is  invariably  made  direct  from  the 


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BRANCH  RECORDS  189 

original  deposit  slips  and  vouchers,  and  called  back 
or  checked  from  the  supplementary  cash  book.  The 
balances  should  be  kept  constantly  extended,  and 
checked  from  time  to  time  by  the  additions  of  the 
debit  and  credit  columns. 

22.  Savings  bank  ledger. — This  book  is  invariably 
in  loose-leaf  form,  ruled  as  in  Figure  23,  in  size  gen- 
erally about  8''  X  11", 

In  a  small  branch  one  ledger  suffices  as  a  rule,  but 
in  the  larger  offices  half  a  dozen  or  more  are  required 
to  take  care  of  the  bank's  deposits.  The  accounts, 
tho  very  numerous,  are  small  in  the  number  of  trans- 
actions, and  a  leaf  is  used  for  each  account.  The 
signature  of  the  depositor  is  generally  taken  on  the 
ledger  sheet  for  convenience  of  reference,  as  well  as 
on  a  signature  card. 

The  rules  given  in  Section  3,  Chapter  IV,  should  be 
carefully  followed.  The  manager  must  control  the 
sheets  and  sign  all  that  are  inserted  in  the  ledger. 
The  bank  pass-books,  which  are  simply  small  copies 
of  the  ledger  sheet,  must  also  be  kept  in  the  custody 
of  the  manager,  and  given  out  in,  say,  dozen  lots,  to 
be  accounted  for  as  used.  It  is  advisable  that  no 
name  shall  appear  on  the  pass-book — just  the  account 
number. 

The  accounts  are  arranged  sometimes  alphabetically 
and  sometimes  numerically.  Both  methods  have 
their  adherents.  In  either  case  they  are  indexed  on 
the  tagged  divisions  or,  in  some  cases,  in  a  separate 
book.     Where  the  accounts  are  very  numerous  the 


190  BANKING  PRACTICE 

ledgers  are  balanced  in  blocks  of  one  or  two  ledgers 
each,  and  in  this  way  errors  are  easily  located. 

23.  Liability  ledger. — This  book  bears  the  same  re- 
lation to  a  bank's  advances  as  the  deposit  ledger  does 
to  the  deposits.  The  latter  shows  how  much  the  bank 
owes  each  customer,  and  the  former  how  much  each 
customer  owes  the  bank.  The  liability  ledger  never 
shows  an  account  in  credit  and  the  deposit  ledger 
should  never  show  an  account  at  debit. 

There  are  many  different  kinds  of  liability  ledgers 
in  use,  some  very  elaborate.  The  simpler  forms 
are  the  more  practical,  the  main  object  being  to  see 
at  a  glance  how  much  of  each  kind  of  paper  a 
customer  has  under  discount,  the  names  of  security 
against  each  note,  and  the  total  amount  of  ad- 
vances. 

A  simple  form  is  given  in  Figure  24.  This  pro- 
vides progressive  balances  for  loans  and  trade  bills, 
and  space  for  particulars  of  securities,  other  names, 
etc.  The  total  of  the  loan  and  trade  bills  at  any  time 
shows  the  amount  of  the  customer's  total  direct  liabil- 
ity to  the  bank.  Frequently,  however,  a  customer 
is  an  obligant  either  as  maker  or  indorser  on  a  note 
discounted  for  another  customer,  and  it  is  important 
for  the  bank  to  know  how  much  of  such  indirect  lia- 
bility is  outstanding.  This  class  of  paper  can  be  in- 
dicated by  an  entry  in  red  ink,  but  is  omitted,  of 
course,  from  the  balance,  as  it  has  been  posted  once  to 
the  account  of  the  customer  discounting  it.  In  this 
way  a  note  with  half  a  dozen  indorsers  can  be  re- 


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192  BANKING  PRACTICE 

corded  against  each  account  in  red  ink  without  affect- 
ing the  ledger  balance. 

Where  accounts  involve  the  discounting  of  a  large 
amount  of  trade  paper,  small  loose-leaf  books  are 
used,  known  as  "Blue  Books"  (see  Figure  25),  one 
for  each  account,  and  by  this  means  track  is  kept  of 
the  total  amount  due  from  each  borrower's  customers. 
AVhen  a  blue  book  is  used,  the  totals  only,  debit  or 
credit,  are  entered  in  the  liability'  ledger,  no  details 
being  required.  The  resulting  balance  in  the  ac- 
count, however,  should  agree  with  the  total  of  the 
balances  in  the  blue  book.  The  total  amount  of  trade 
bills  in  an  account  is  not  of  great  importance,  pro- 
vided all  the  paper  represents  goods  sold  and  deliv- 
ered to  responsible  purchasers.  The  total  amount 
on  any  one  name,  however,  is  vitally  important,  and 
should  not  be  allowed  without  special  consideration  to 
exceed  five  per  cent  of  the  total  amount  of  trade  bills. 

24.  Collection  register. — The  form  shown  in  Fig- 
ure 26  is  an  economical  ruling,  as  it  only  occupies  one 
page  and  gives  all  required  particulars.  If  neces- 
sary, two  lines  can  be  used  for  an  item  which  requires 
a  fuller  description  than  ordinaiy.  The  entry  of  the 
name  of  the  maker  or  drawee  is  unnecessary,  for,  in 
the  case  of  a  note  or  accepted  draft,  it  is  entered  at 
once  in  the  collection  diary,  where  space  is  provided 
for  the  maker's  name.  If  it  is  a  draft  for  acceptance, 
the  drawee's  name  is  entered  in  the  messenger's  book, 
and  in  due  course  the  draft  is  either  returned  re- 
fused to  the  correspondent  or  entered  in  the  diary. 


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103 


194  BANKING  PRACTICE 

In  the  case  of  customers  who  have  a  large  number 
of  collections,  separate  forms  are  frequently  provided, 
on  which  the  customer  lists  the  items  himself  in  dupli- 
cate and  the  bank  files  the  list  in  a  binder  as  its  regis- 
ter and  diary,  adopting  the  customer's  nimiber  as  its 
own.  An  initial  letter  or  prefix  number  can  be  used 
to  distinguish  one  account  from  another.  (Figure 
28.) 

Collection  diaries  are  very  similar  in  form  to  those 
used  for  bills  for  discount,  and  need  no  special  de- 
scription. 

25.  Collateral  register. — The  collateral  register  is 
generally  a  loose-leaf  book  with  an  alphabetical  in- 
dex, ruled  as  in  Figure  27.  A  page  is  given  to  each 
account,  and  the  balance  should  always  show  the 
amount  of  notes  held  as  collateral.  The  collection 
diary  is  used  to  diarize  collateral  notes,  the  entries  be- 
ing made  in  red  ink  to  distinguish  them  from  ordi- 
nary collections.  Where  a  large  number  of  collater- 
als are  received  from  customers  they  can  be  listed  on 
separate  sheets  and  the  totals  only  entered  in  the  reg- 
ister ( Figure  28 ) . 

26.  General  statement  books. — In  connection  with 
the  monthly  return  to  the  government  each  branch 
forwards  to  its  head  office  a  complete  financial  state- 
ment of  its  affairs  at  the  close  of  business  on  the  last 
day  of  the  month.  This  is  obtained  from  the  general 
ledger,  and  a  copy  of  the  statement  is  made  on  a  book 
called  the  general  statement  book.  The  general  led- 
ger is  also  balanced  weekly,  say,  on  the  8th,  15th  and 


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196  BANKING  PRACTICE 

23rd  of  each  month,  and  a  statement  sent  to  the  head 
office  either  in  exact  form  or  in  even  thousands,  the 
latter  method  being  sufficiently  close  for  all  general 
purposes. 

27.  Balance  booh. — The  balance  book  is  used  to 
record  the  trial  balances  and  adjustments  of  the  dif- 
ferent accounts  in  the  office.  The  balances  should  be 
taken  off  on  loose  leaves  and  filed  in  a  binder,  either 
continuously  in  chronological  order,  or  consecutively 
under  tagged  divisions,  one  for  each  class  of  balance. 
The  divisions  would  be  made  for  the  various  ledger 
balances,  draft  accounts,  list  of  loan  and  trade  bills, 
cash  items  account,  etc. 

28.  Overdraft  register. — It  is  very  important  that 
the  manager  should  be  fully  informed  of  the  amount 
and  nature  of  the  overdrawn  accounts  in  his  office. 
This  register  should  be  written  up  each  morning  and 
placed  on  the  manager's  desk  so  that  he  may  have 
before  him  a  daily  indicator  of  the  status  of  accounts 
to  serve  as  a  guide  in  extending  further  business. 

29.  Discrepancies  book. — Canadian  banks  are  very 
strict  in  their  rules  regarding  the  correction  of  errors 
in  the  books,  any  erasures  being  absolutely  forbid- 
den. Errors  discovered  immediately  by  a  clerk 
should  be  neatly  cancelled  in  ink  and  the  correct  fig- 
ures entered  above.  All  other  corrections  must  be 
made  by  a  reversing  entry  thru  the  cash  book;  full 
particulars  must  be  entered  in  the  discrepancy  book 
and  compared  and  initialed  by  the  manager  or  ac- 
countant. 


BRANCH  RECORDS  197 


REVIEW 

What  is  the  principal  book  in  bank  acoounting  ?  Why  ?  What 
books  are  added  as  the  bank  grows? 

Make  a  list  of  the  books  used  in  a  fairly  large  branch  and  in- 
dicate the  importance  of  the  record  kept  in  each. 

What  is  the  legal  value  of  accounts  kept  in  loose  leaf  form? 

How  are  remittances  for  collections  made  to  other  banks  ? 

Why  are  all  correspondents'  accounts  not  kept  at  a  branch? 


CHAPTER  V 

DEPOSIT  BUSINESS 

1.  New  accounts. — As  a  rule,  no  new  account  is 
opened  in  a  bank  except  under  the  authority  of  the 
manager  or  accountant,  expressed  by  initials  on  the 
deposit  slip.  In  other  words,  the  privilege  of  a  check- 
ing account  should  be  extended  onlj^  to  persons  who 
are  known  to  be  of  good  character  and  reputation, 
and  therefore  no  account  should  be  opened  with  a 
stranger  until  he  has  been  satisfactorily  identified. 
To  do  otherwise  is  to  leave  an  opening  for  fraud. 
Ledger-keepers  are  usually  held  equally  responsible 
with  the  tellers  for  any  deviation  from  the  regula- 
tions laid  down  in  connection  with  the  opening  of 
new  accounts,  especially  with  strangers. 

2.  Opening  accounts. — IVlien  an  account  is  opened 
a  specimen  signature  of  the  depositor  duly  witnessed 
should  be  obtained  and  placed  on  file — the  card  sys- 
tem is  the  best — for  ready  reference.  In  the  case  of  a 
firm  or  company  a  specimen  signature  of  each  part- 
ner, or  of  the  properly  constituted  signing  officers,  re- 
spectively, should  be  taken.  If  a  power  of  attorney 
is  filed,  a  specimen  of  the  attorney's  signature  as 
such  should  be  placed  on  file. 

Every  customer  opening  an  account  in  the  current 

198 


DEPOSIT  BUSINESS  199 

account  ledger  should  be  provided  with  a  pass-book 
and  a  book  of  checks.  This  does  not  apply,  how- 
ever, to  out-of-town  customers,  copies  of  whose  ac- 
counts are  sent  monthly  usually. 

Care  should  be  taken  in  handing  out  check  books 
and  other  supplies  to  customers.  The  nature  and 
importance  of  an  account  should  govern  the  size  of 
the  pass-book  and  the  check  book  supplied. 

3.  Particulars  to  he  recorded  in  ledger. — The  full 
name,  designation  or  occupation,  and  address  of  each 
customer  is  written  at  the  head  of  every  page  of  the 
account  in  the  ledger.  If  the  customer  is  a  farmer, 
his  lot,  concession,  and  township  as  well  as  his  post 
office  address  should  be  recorded.  A  concise  descrip- 
tion of  the  personal  appearance  or  other  mark  of 
identification  of  all  customers  who  cannot  write  their 
names  should  be  noted  in  the  ledger  or  on  the  signa- 
ture card.  Special  care  should  be  taken  to  record 
correctlv  the  names  of  siiminff  officers  of  benevolent 
and  friendly  societies,  lodges  and  other  bodies  of  this 
kind,  their  powers  and  other  useful  information. 

In  the  case  of  a  firm,  the  names  of  the  partners 
and,  where  there  is  a  special  partnership,  the  date  of 
its  expiry  should  be  recorded  in  the  ledger;  if  a  trust 
estate,  the  names  of  the  trustees  and  in  the  case  of 
corporations,  etc.,  the  names  of  the  officials  autlior- 
ized  to  sign  checks. 

In  the  case  of  powers  of  attorney  or  of  by-laws  au- 
thorizing officers  of  incorporated  companies  to  sign 
for  such  companies  lodged  with  the  bank,  the  record 


200  BANKING  PRACTICE 

should  state  the  date  when  the  power  is  granted,  the 
names  of  the  persons  authorized  to  sign,  the  extent 
of  the  power  and  the  limitations  placed  upon  its  use, 
if  any.  Special  sheets  are  usually  supplied  for  re- 
cording such  information  in  order  to  obviate  the  ne- 
cessity of  carrying  forward  the  particulars  from  page 
to  page ;  these  are  inserted  at  the  front  of  the  account. 
4.  Partnership  accounts. — The  law  does  not  recog- 
nize co-partnerships  of  professional  men,  i.e.,  in  con- 
tradistinction to  traders ;  therefore,  the  individual  sig- 
nature of  each  member  is  requisite  to  paper  of  all 
kinds.  Otherwise,  if  an  account  is  opened  in  the 
name  of  a  firm  of  solicitors,  architects  or  other  non- 
trading  partnerships,  a  written  agreement  should  be 
taken  (Figure  29),  signed  by  each  of  its  members, 
whereby  they  undertake  to  be  jointly  and  severally 

NON-TRADING  PARTNERSHIP 
SIGNATURE  BY  ANY  MEMBER  TO  BIND 

'......'.......[...[. 191.... 

To   THE    MaXAGER 

THE BANK 

We,  the  undersigned,  composing  the firm  of 

do   hereby 

acknowledge  and  agree  that  we  are  and  will  be  jointly  liable  and 
responsible  to  the Baxk  for  all  transac- 
tions entered  into,  or  to  be  entered  into,  with  the  said  Bank  in  the 
name  of  our  said  firm  by  any  individual  member  of  the  same,  and 
that  the  signature  of  the  name  of  our  firm  by  any  member  of  the 
same  to  any  note,  bill,  draft,  check,  receipt  or  other  document  shall 
be  as  binding  on  us  as  if  such  signature  had  been  affixed  by  each  of 
us  respectively  under  our  own  hands. 


FlGUKE   -29 


DEPOSIT  BUSINESS  201 

liable  for  every  transaction,  by  check,  note  or  draft, 
signed,  made  or  indorsed,  entered  into  with  the  bank 
by  any  individual  member  of  the  co-partnership  in 
the  firm  name,  or  by  any  person  they  may  designate  to 
transact  business  with  the  bank  on  their  behalf.  Iii 
the  latter  case  a  differently  worded  form  is  used. 

5.  Conversion  of  partnership  into  joint  stock  com- 
pany.— The  conversion  of  a  partnership  into  a  joint 
stock  company  entails  upon  a  manager  the  immediate 
necessity  of  obtaining  from  them  and  placing  on  file  a 
copy  of  the  company's  by-laws,  so  that  all  transactions 
may  be  made  to  conform  to  legal  requirements.  Also, 
it  should  never  be  overlooked  that  a  partnership  dif- 
fers from  a  corporation  in  that  the  latter  is  absolutely 
restricted  by  the  terms  of  its  charter,  and  its  officer^ 
by  the  authority  conferred  upon  them  by  the  by-laws. 
The  same  reasoning  necessarily  applies  to  new  cus- 
tomers who  are  already  joint  stock  companies. 

6.  Joint  accounts. — Where  a  deposit  is  made  to  the 
credit  of  two  parties  jointly,  the  form  which  should 
be  used  is  as  follows:  "John  Smith  and  Jane  Smith, 
or  either  of  them,"  and  a  declaration  signed  by  both 
should  be  taken  in  every  instance  to  the  effect  that  the 
bank  is  authorized  to  pay  checks  on  the  account  signed 
by  either  or  both.      (See  Figm-e  30.) 

7.  Accounts  with  married  women. — In  the  Prov- 
ince of  Quebec,  on  account  of  the  restrictions  imposed 
by  the  law  of  that  province  on  married  women,  it  is 
essential  that  the  fullest  particulars  should  be  ob- 
tained at  the  time  the  deposit  is  taken.     When  a  mar- 


202  BANKING  PRACTICE 

191, 

To   THE    MaxaGER 

THE BANK 


Dear  Sir: 

You  have  a  deposit  account  standing  in  the  name  of  " 

or  either  of  them."     We 

authorize  you  to  pay  and  charge  against  said  account  all  sums  evi- 
denced by  checks  on  your  branch  or  other  v^ouchers  signed  by 

or    either 

of  them,  and  we  confirm  the  verbal  instructions  to  this  effect  already 
given  to  you,  and  all  acts  done  by  you  in  pursuance  thereof. 

Yours  trulv- 


FlGURE   30 

JOINT  ACCOUNT 

ried  woma'n  makes  a  deposit,  the  name  of  her  hus- 
band, with  the  post  office  address  of  each  (in  the  event 
of  their  not  hving  together) ,  should  be  given.  Any 
other  information  necessary  to  identify  or  locate  the 
depositor  should  be  noted. 

HUSBAND'S  AUTHORIZATION 

TO  OPEN  BANK  ACCOUNT 

For  use  in  Quebec 

To  THE  Manager  of 

THE BANK 

I  hereby  authorize  my  wife    

to  open  an  account  in  her  own  name  with  the 

Baxk;  to  deposit  or  indorse  for  deposit  to  the  credit  of  such  account, 
money,  checks,  drafts  or  other  negotiable  instruments;  to  receive 
deposit  receipts  and  surrender  tlie  same;  to  draw  checks  upon  the 
said  account  and  to  withdraw  therefrom  the  whole  or  any  part  of 
any  money  standing  to  her  credit  in  such  account,  all  upon  such  terms 
and  conditions  as  may  be  agreed  upon  between  my  said  wife  and  the 
said  Bank;  and  generally  subject  to  terms  of  Art.  181,  C.  C,  to 
perform  all  acts  of  administration  with  regard  to  said  account. 
And  I  hereby  agree  to  hold  the  said  Bank  harmless  in  respect  of  all 
transactions  between  my  said  wife  and  the  said  Bank  done  or  entered 
into  in  pursuance  of  the  foregoing  authorization. 

191 

Figure  31 


DEPOSIT  BUSINESS  203 

When  opening  such  an  account  it  is  advisable  in 
every  instance  to  obtain  the  husband's  authorization 
to  withdraw  money  (Figure  31),  as  without  this  she 
would  be  restricted  to  withdraw  an  amount  not  ex- 
ceeding $500  in  all.  A  separate  authorization  on 
each  withdrawal  would  be  satisfactory,  but  this  is  not 
always  convenient. 

In  the  Province  of  Quebec  no  married  woman  can 
enter  into  a  contract,  sign  or  indorse  a  note,  or  bind 
herself  in  any  way  for  the  benefit  of  her  husband. 
Therefore  notes  signed  or  indorsed  by  married 
women  should  be  refused. 

The  law  in  this  respect,  however,  is  not  so  strict  in 
the  other  provinces,  but  recently,  by  a  judgment  of 
the  Supreme  Court,  confirmed  by  the  Privy  Council, 
it  was  decided  that  a  married  woman's  guarantee  or 
indorsement  for  her  husband  is  void  unless  she  signs 
independently  (Stuart  versus  Bank  of  Montreal). 

Therefore  in  these  latter  provinces  if  it  is  found 
expedient  or  necessary  to  have  a  wife  join  in  a  guar- 
antee or  indorsement  on  her  husband's  behalf,  care 
must  be  taken  to  see  that  she  has  had  the  advice  of 
her  friends,  of  whom  her  husband  is  not  to  be  one,  and 
of  a  lawyer  other  than  her  husband's  legal  adviser, 
with  a  declaration  from  the  latter  that  she  has  been  so 
advised. 

8.  Waiver  and  authority/  to  charge  hack. — An  au- 
thority ( see  Figure  32 )  to  charge  back  returned  bills, 
notes,  etc.,  should  be  taken  from  every  customer 
whose  account  is  an  active  one.     In  every  case  of 


204  BANKING  PRACTICE 

The  Maxaoer 

THE BANK 


Dear  Sir: 

In  consideration  of  your  lending  money  to  the  undersigned  or  dis- 
counting for  or  taking  on  deposit  or  for  collection  or  otherwise  from 
the  undersigned  bills  of  exchange,  promissory  notes,  checks  or  other 
securities  payable  at  points  at  which  there  is  no  branch  of  a  char- 
tered bank  of  Canada,  you  are  hereby  authorized  to  forward  the  same 
for  collection  to  any  National  Bank,  State  Bank,  private  banker  or 
private  firm,  and  the  undersigned  hereby  undertakes  to  keep  you 
fully  indemnified  against  any  loss  arising  from  the  default  or  failure 
of  any  such  bank,  private  banker  or  private  firm  to  account  to  you 
for  the  said  bills  of  exchange,  promissory  notes,  checks  or  other 
securities  so  forwarded  or  for  any  sum  or  suras  collected  on  account 
thereof. 

The  undersigned  hereby  waives  every  presentment,  notice  of  dis- 
honor and  protest  of  alJ  bills  of  exchange,  promissory  notes  and 
checks  now  or  hereafter  drawn,  made  or  indorsed  by  the  undersigned, 
and  now  or  hereafter  deposited  with  or  delivered  to  you  for  collec- 
tion or  discount  or  as  security  or  otherwise.  The  undersigned,  to 
avoid  expense,  requests  you  not  to  protest  such  bills  of  exchange, 
promissory  notes  and  checks,  and  agrees  not  to  hold  you  or  your 
agents  liable  for  not  presenting  or  protesting  or  giving  notice  of 
dishonor  of  the  same  and  to  become  and  remain  as  fully  liable  to  you 
upon  and  for  said  bills  of  exchange,  promissory  notes  and  checks  as 
if  its  presentment,  protest  and  notice  hereby  waived  were  duly  made 
and  given. 

The  undersigned  hereby  authorizes  you  to  debit  the  account  of  the 
undersigned  with  you  with  the  amount  of  any  bill  of  exchange,  prom- 
issory note  or  check  payable  at  your  office  and  which  may  be  now  or 
hereafter  drawn,  made  or  accepted  by  the  undersigned,  and  with  the 
amount  of  any  bill  of  exchange,  promissory  note  or  check  which 
having  been  previously  credited  to  the  said  account  is  returned  to 
the  Bank  unpaid,  and  with  all  such  charges  and  expenses  as  the 
Bank  shall  have  properly  incurred  in  connection  therewith,  and  the 
undersigned  agrees  to  repay  to  the  Bank  the  amount  so  debited  to 
the  account  of  the  imdersigned. 

The  above  shall  hind  the  successors  and  assigns  of  the  undersigned. 

Dated  at the day  of 

19.... 

Figure  32.     A^'Am;R  of  Protest 

charging  a  customer's  account  with  a  returned  or  dis- 
honored bill,  note  or  check,  the  ledger-keeper  should 
immediately  notify  the  customer  by  mail  of  the  debit. 
A  special  form  of  advice  is  usually  used  for  this  pur- 
pose, which  is  written  in  duplicate,  the  original  being 


DEPOSIT  BUSINESS  205 

mailed  to  the  customer  and  a  carbon  copy  used  as  a 
voucher  to  be  charged  to  the  account. 

Dishonored  bills,  acceptances  and  the  like  charged 
to  an  account  should  not  be  given  up  until  the  cus- 
tomer's check  has  been  received  therefor  or  the  ac- 
count verified  and  the  usual  receipt  for  checks  and 
vouchers  received. 

If  there  are  not  sufficient  funds  in  an  account  to 
retire  such  items  they  should  be  held  in  the  overdue 
file  until  provided  for. 

9.  The  ledger. — It  is  the  rule  in  most  banks  that  no 
entries  shall  be  made  in  any  ledger  by  anj^  officer  other 
than  the  accredited  ledger-keeper.  All  entries  are 
made  from: 

(a)  Checks,  acceptances,  di'afts,  notes,  etc.,  of  cus- 
tomers. 

(b)  Deposit  slips  initialed  by  the  teller. 

(c)  Debit  slips  for  items  charged  up,  etc.,  initialed 
by  the  manager  or  accountant. 

The  rules  regarding  loose-leaf  ledgers  should  be 
carefully  followed  both  as  regards  the  current  account 
ledgers  and  savings  bank  ledgers.^  The  ledger- 
keeper  should  watch  out  carefully  for  customers  hav- 
ing the  same  or  similar  names,  as  there  is  always  the 
danger  of  a  mistake  occurring  between  the  two  ac- 
counts. In  such  case  it  is  advisable  to  put  a  warning 
notation  on  the  account,  as  well  as  in  the  index,  so  as 
to  attract  the  attention  of  any  one  looking  up  the  ac- 
count.    All  indexing  should  be  carefully  checked. 

1  See  Section  3,  Chapter  IV. 


206 


BANKING  PRACTICE 


10.  Deposit  slips. — The  usual  form  of  deposit  slip 
is  shown  in  Figures  33  and  34.  The  deposit  slip  after 
being  checked,  stamped  and  initialed  by  the  teller 
should  be  handed  by  him  direct  to  the  ledger-keeper. 
The  latter  should  see  that  each  slip  has  been  initialed 
and  stamped  by  the  teller;  he  should  then  post  the 
credit  in  the  ledger  and  enter  the  amount  in  the  cus- 
tomer's pass-book,  initiahng  the  entry.  At  the  same 
time  he  should  enter  in  the  pass-book  all  checks  which 
have  been  charged  to  the  account  since  the  book  was 
last  presented  and  insert  the  correct  balance  accord- 
ing to  the  ledger.     No  blank  lines  should  be  left  be- 


THE  CANADIAN  BANK                               THE  CANADIAN  BANK. 
OF  COMMERCE                                            OF  COMMERCE 

CREDIT 

SAVINGS  BANK  DEPARTMENT 

Account  No. 

For  Oedit  of 

Oociip.ltirin 

OF 

.191 

-jgi 

X      1     = 

y    .1    = 

X.       2      = 

x;     2    ^ 

•X        4      -= 

X        4       = 

;x     5    == 

,X        5       = 

X     10      = 

X      10       - 

X.    20      = 

X      20       = 

X     50      ^ 

X      50      = 

X  noo    = 

X.  100      = 

$ 

Rilvpr 

rhppWR 

$) 

$ 

FiGuni 

:  33 

FiGin 

IE  34. 

DEPOSIT  BUSINESS  207 

tween  the  entries,  or  between  the  entries  and  addi- 
tions of  the  debit  and  credit  columns. 

The  teller  should  not,  when  he  has  received  a  de- 
posit, retui'n  the  deposit  slip  to  the  customer,  that  he 
may  hand  it  to  the  ledger-keeper  for  entry  or  for  any 
other  reason.  To  do  so  would,  obviously,  be  danger- 
ous. 

11,  Money  received  after  Jioiirs. — Frequently 
money  is  received  by  the  teller  too  late  in  the  after- 
noon to  be  entered  on  the  books  on  that  day.  In  that 
case  it  is  the  usual  rule  to  require  the  teller  to  enter 
it  in  his  blotter  for  the  following  day  and  hand  the 
deposit  slip,  after  initialing,  to  the  accountant,  who 
will  have  it,  if  a  customer's  deposit,  entered  in  the 
ledger  at  once.  This  practice  is  followed  in  order 
that  no  deposit  may  remain  overnight  um*ecorded  and 
entirely  in  the  hands  of  one  officer. 

12!  Customers^  imss-boolxs. — The  teller  should  not 
make  any  entry  in  the  pass-books  of  customers,  or  in 
any  of  the  books  of  the  bank  other  than  his  blotter  and 
balance  book. 

Pass-books  are  collected  from  customers  at  the  end 
of  each  month  in  order  to  be  written  up  and  balanced 
on  the  last  day  of  the  month.  The  work  is  usually 
done  on  the  evening  of  the  last  day  of  the  month, 
when  the  entire  staff,  with  the  exception  of  the  teller, 
assists  with  the  work  in  order  that  the  pass-books  may 
be  ready  for  the  customers  the  following  morning. 
Altho  the  teller  takes  no  part  in  writing  up  and  bal- 
ancing customers'  pass-books,  he  may  assist  in  com- 


208  BANKING  PRACTICE 

paring  the  checks  with  the  entries  in  the  books  after 
they  are  balanced.  The  manager  or  accountant,  pro- 
vided the  latter  does  not  also  act  as  teller  or  ledger- 
keeper,  afterward  compares  the  balances  in  the  pass- 
books with  the  corresponding  balances  in  the  ledger, 
attesting  the  comparison  by  placing  his  initials  oppo- 
site the  balance  in  the  ledger,  and  against  the  balance 
carried  forward  in  the  pass-book. 

13.  Customers'  certification  of  accounts. — Each 
balanced  pass-book  when  delivered  to  a  customer 
should  be  accompanied  by  a  certificate  (Figure  35), 
stating  the  amount  of  the  balance  and  the  number  of 
checks  returned.  The  checks  may  be  returned  at  the 
same  time  if  the  customer  or  his  attorney  is  prepared 
to  compare  these  with  the  pass-book  and  sign  the  cer- 
tificate at  the  bank  coimter;  otherwise  the  certificate 
should  be  signed  and  returned  to  the  bank  before  the 
checks  are  surrendered. 

THE BANK 

191 

The  undersigned  hereby  agrees  with  the 

Baxk  that  at  the  close  of  business  on  the day 

of the  balance  of  the  accounts  and  dealings 

between  the  undersigned  and  the  Bank  is  the  sum  of 

Dollars  in  favor  of  the — "  ""  "' — r- 

.„„  undersigned. 

And  in  consideration  of  the  account  of  the  undersigned  as  a  cus- 
tomer of  the  Bank  being  not  now  closed,  and  subject  to  tlie  correc- 
tion of  clerical  errors  (if  any),  the  Bank  is  hereby  released  from 
all  claims  by  the  undersigned  in  connection  with  the  charges  or 
credits  in  said  accounts  and  dealings  up  to  said  day. 

The  undersigned  hereby  acknowledges  receipt  of  the  checks  charged 
in  said  accounts. 

N.B. — This  receipt  must  be  signed  by  the  Customer  or  his  Attorney. 

Figure  35 
Pass  Book  Certificate 


DEPOSIT  BUSINESS  209 

In  the  case  of  out-of-town  customers,  receipts  ( Fig- 
ure 36)  should  be  obtained  before  the  checks  are  sur- 
rendered. It  may  be  necessary  to  make  exceptions 
in  special  cases,  when  vouchers  should  be  carefulUy 

191 

RECEIVED    from   The Bank 

Insert  the   num-   pass-book  and checks 

in '^  words —^not   ^"^    vouchers    for    amounts    charged   to   my/our   account 
figures                   in    the    books    of   the    said    Bank   during   the    month   of 
last. 

Figure  3G 

compared  with  the  pass-book  or  copy  of  the  custom- 
er's account  by  a  second  officer  before  being  mailed, 
so  that  in  event  of  a  loss  in  transit  or  of  a  dispute  with 
a  customer,  the  bank  may  be  able  to  prove  that  the 
vouchers  were  dispatched.  In  eveiy  case  in  which 
checks  are  sent  out  before  the  receipt  is  obtained  they 
should  be  sent  by  registered  mail.  After  being 
signed  the  certificates  should  be  checked  with  the  led- 
ger by  the  manager  or  accountant,  who  should  place 
his  initials  and  the  number  of  the  vouchers  opi^osite 
each  balance  in  the  ledger. 

As  this  certificate  is  equivalent  to  an  adjustment 
of  the  account  between  the  bank  and  its  customer,  it 
is  very  important  that  as  few  balances  as  possible  re- 
main uncertified. 

14.  Guarding  against  fraud. — Fraud  has  been  per- 
petrated upon  employers  by  confidential  clerks  mak- 
ing false  entries  in  a  bank  pass-book,  or  by  keeping  a 
spurious  pass-book  for  the  eye  of  their  employers.  It 
is   fully   within  the   range   of  an  observant   officer's 


XVI— 15 


no  BANKING  PRACTICE 

power  for  the  safeguarding  of  the  bank  and  the  pro- 
tection of  its  clients  to  detect  embezzlement  attempted 
by  such  methods.  If  an  account,  operated  under  a 
power  of  attorney,  or  by  one  particular  employee,  is 
frequently  overdrawn,  or  if  anything  of  a  question- 
able nature  occurs  in  the  working  of  the  account,  the 
circumstances  should  be  discreetly  brought  to  the  no- 
tice of  the  principal  by  the  manager. 

As  the  teller  comes  more  into  contact  with  the  pub- 
lic than  any  other  officer  he  has  exceptional  oppor- 
tunities for  observing  things  which  may  be  of  great 
use  to  the  manager.  He  should  train  himself  to  ob- 
serve every  circumstance  connected  with  each  trans- 
action, and  especially  with  any  unusual  occurrence. 
Any  attempt  at  "kiting"  by  means  of  checks  should 
be  reported  at  once  to  the  manager,  who  will  deal  with 
it  as  he  may  consider  advisable.  This  applies  also  to 
accommodation  checks,  indeed,  to  anything  unusual 
or  irregular. 

15.  Certification  of  checks. — Checks  are  accepted 
by  the  ledger-keeper  only  after  they  have  been 
charged  to  the  account  on  which  they  are  drawn. 
Checks  should  not  be  marked  "good"  by  the  man- 
ager or  any  other  officer  unless  previously  debited  to 
the  proper  account,  or  be  crossed  "Negotiable  at  par" 
thru  another  branch  until  accepted. 

No  check  should  be  chars^ed  to  an  account  unless 
there  are  funds  at  credit  to  meet  it,  without  the  au- 
tliorization  of  the  manager  signified  by  his  initials  on 
the  check.     A  check  which  has  been  altered  or  erased 


DEPOSIT  BUSINESS  211 

in  any  vital  part  should  be  refused.  Any  blank  space 
in  the  amount  should  be  distinctly  filled  in  or  the  cus- 
tomer's attention  called  to  it.  In  accepting  a  check 
which  has  been  carelessly  filled  in  the  ledger-keeper 
should  write  across  the  face  of  the  check  the  amount 
for  which  he  has  accepted  it,  so  that  it  cannot  be 
"raised"  or  changed  to  a  larger  amount. 

In  the  case  of  a  check  for  which  there  are  funds 
being  returned  for  some  informality  in  the  indorse- 
ment, it  should  be  "accepted"  before  being  sent  back 
for  correction. 

No  overdraft  should  be  allowed  without  the  per- 
mission of  the  manager  expressed  in  writing  at  the 
head  of  the  account  or  by  his  initials  on  the  checks. 

16.  Cashing  checks. — Tellers  are  generally  forbid- 
den to  cash  or  receive  on  deposit  unaccepted  checks 
on  any  bank,  or  any  drafts  or  other  items  unless  they 
have  been  initialed  by  the  manager.  In  special  cases, 
where  the  manager  deems  it  necessary,  he  may  give 
the  tellers  written  authorization  to  accept  from  cer- 
tain customers  checks,  drafts  and  items  to  a  specified 
limit.  This  is  only  done,  however,  when  the  \\n- 
doubted  responsibility  of  the  customers  justifies  this 
action. 

The  possibility  of  being  victimized  by  confidential 
clerks  or  other  employes  of  the  bank's  customers  by 
means  of  forged  or  raised  checks  should  always  be 
borne  in  mind.  A  check  for  an  appreciably  larger 
sum  than  is  customary,  for  which  cash  is  demanded  in 
payment,  is  in  itself  significant  and  should  excite  sus- 


212  BANKING  PRACTICE 

picion.  A  check  drawn  payable  to  the  customer  of 
another  bank  should,  in  the  ordinary  course  of  busi- 
ness, be  presented  thru  the  other  bank,  and  such  a 
check,  even  if  payable  to  bearer,  presented  over  the 
counter  for  cash  should  carry  suspicion  on  its  face 
and  suggest  inquiry. 

It  should  always  be  borne  in  mind  by  the  teller  that 
accepted  checks,  bank  drafts,  express  orders  and  cir- 
cular letters  of  credit  are  also  all  liable  to  forgery  and 
alteration ;  payments  made  on  the  latter,  especially  to 
strangers,  should  be  limited  to  a  reasonable  amount 
for  traveling  requirements.  If  they  call  for  a  large 
amount  great  care  should  be  exercised. 

Checks  payable  to  corporations  or  wholesale  firms 
should  not  be  paid  over  the  counter  of  the  bank  to 
an  employe  without  express  authority  of  the  company 
or  firm. 

Checks  should  not  be  cashed  for  strangers  until 
they  have  been  satisfactorily  identified;  even  then, 
there  is  not,  as  a  rule,  much  profit  to  a  bank  in  the 
transaction. 

No  identification  is  safe  or  satisfactory^  excepting 
the  attendance  at  the  bank  of  a  well-known  and  re- 
sponsible person,  who  indorses  the  check  or  other  in- 
strument in  the  presence  of  an  officer  of  the  bank. 
Any  other  ostensible  identification  or  indorsement 
may  be  fraudulent.  A  person  who  forges  the  sig- 
nature to  a  check,  or  raises  the  amount  of  a  draft, 
or  steals  any  negotiable  instrument,  might  be  pre- 
sumed also  to  forge  a  letter  of  identification  or  an 


DEPOSIT  BUSINESS  213 

indorsement,  to  serve  the  purpose  of  identification. 
The  safest  course  is  always  to  give  the  bank  the  ben- 
efit of  the  doubt. 

A  written  identification  which  purports  to  be  that 
of  a  hotel-keeper  or  hotel  clerk  is  especially  open  to 
suspicion. 

Every  check  for  a  large  sum  should  be  particu- 
larly scrutinized,  and  the  attention  of  the  manager 
called  to  it. 

Customers  or  others  who  are  unable  to  write  and 
who  sign  by  mark  on  checks  or  other  docmuents, 
should  be  identified  to  the  satisfaction  of  the  teller, 
but  in  no  case  should  the  teller  witness  the  mark, 
which  should  be  attested  by  an  independent  witness, 
not  an  officer  of  the  bank. 

17.  Savings  hank  department. — The  rules  to  be  ob- 
served with  respect  to  the  current  account  ledger  are 
applicable  to  the  savings  bank  ledger,  with  the  fol- 
lowing exceptions: 

The  manager  should  take  charge  of  and  keep  under 
lock  and  key  all  blank  savings  bank  pass-books,  and 
issue  them  to  the  ledger-keeper  in  unnumbered  lots  of 
one  or  two  dozen,  as  he  may  think  best,  keeping  a 
record  thereof  and  verifying  them  according  to  the 
new  numbers  when  checking  the  ledger  entries  with 
the  supplementary  cash  book.  Should  it  be  neces- 
sary to  issue  a  new  book  in  continuation  of  an  old  ac- 
count the  ledger-keeper  should  then  and  there  draw 
the  manager's  or  accountant's  attention  thereto.  By 
this  method  it  is  intended  that  the  manager  should 


214  BANKING  PRACTICE 

personally  know  that  no  deposit  is  received  for  a  new 
account  without  a  corresponding  credit  to  the  ledger. 

The  savings  bank  pass-book  should  be  presented 
when  withdrawals  are  desired  so  that  the  entry  can 
be  made  in  the  book  itself.  Whenever  it  is  necessary 
to  make  an  exception  to  this  rule  there  should  be  no 
question  as  to  the  depositor's  identity,  and  the  man- 
ager should  initial  the  check,  making  note  of  any  par- 
ticulars, especially  the  name  and  address  of  any  out- 
side party  called  in  for  identification. 

When  a  savings  bank  account  is  closed  the  pass- 
book should  be  returned  and  written  up  in  full  with 
a  heavy  line  ruled  across  the  page  under  the  last  en- 
try, and  filed  away  by  the  ledger-keeper  in  a  box 
provided  for  the  purpose. 

18.  Duplicate  jmss-hoohs. — Where  the  identifica- 
tion of  the  depositor  is  without  question,  and  the  man- 
ager is  fully  satisfied  that  the  pass-book  has  been  lost, 
the  balance  of  the  account  should  be  withdrawn  by 
check  and  a  new  account  opened  with  a  book  under  a 
new  number.  A  memorandum,  giving  the  circum- 
stances of  the  case,  should  be  made  on  the  old  account 
in  the  ledger. 

19.  Machine  statements. — Nearly  all  the  large  city 
branches  of  Canadian  banks  have  adopted  the  prac- 
tice of  rendering  machine  statements  of  the  custom- 
ers' accounts  in  preference  to  using  pass-books  for 
the  purpose.  The  statement  system  eliminates  the 
dreaded  "pass-book  night"  at  the  end  of  the  month, 
reheves  the  congestion  at  the  ledger  wicket,  enables 


DEPOSIT  BUSINESS  215 

the  accountant  or  statement  clerk  to  maintain  a  con- 
stant check  on  the  accuracy  of  the  ledger  balances 
and,  above  all,  lessens  the  chance  of  fraud  and  error 
by  insuring  the  receipt  bj^  each  customer  of  a  state- 
ment of  his  account  at  regular  intervals,  monthly  or 
weekly  as  desired.  With  the  pass-book  system  a  mis- 
take might  run  for  several  weeks  or  months  thru  the 
failure  of  the  depositor  to  bring  in  his  pass-book  to  be 
balanced.  Wliere  a  regular  statement  is  sent  an 
error  is  sure  to  be  detected  on  receipt. 

The  adoption  of  the  statement  system  involves  no 
extra  expense  in  the  long  run,  as  the  improved  serv- 
ice to  the  customers  soon  justifies  the  initial  expense 
of  the  statement  machine  and  the  salary  of  a  state- 
ment clerk. 

The  machine  usually  used  is  the  Burroughs  Adding 
Subtracting  Statement  machine  and  the  method  of 
operation  is  very  simple.  After  the  checks  and  de- 
posits passing  thru  the  current  ledger  have  been 
checked  to  the  supplementary  cash  book  the  first 
thing  in  the  morning,  they  are  canceled  and  handed 
to  the  statement  clerk,  who  lists  them  on  the  various 
statements.  Figure  37  with  the  perforated  balance 
slip  to  the  left  is  the  form  in  general  use.  The  o])- 
erator  first  records  on  the  machine  the  last  balance 
shown  on  the  statement  and,  after  making  all  the  pre- 
vious day's  entries,  debits  and  credits,  extends  the 
balance  to  date.  As  it  is  necessary  to  have  slijDS  for 
each  entry  the  ledger-keeper  furnislies  the  statement 
clerk  with  a  memorandum  for  each  accepted  check 


216 


BANKING  PRACTICE 


outstanding,  which  is  replaced  by  the  check  itself  as 
soon  as  it  comes  in.  The  statements  are  filed  in  in- 
genious trays  so  divided  that  the  balance  slips  of  the 
day's   operative  accounts   project   from  the   general 

PLEASE  EXAMINE  AT  ONCE  AND  REPORT  ANY  DIFFERENCE  IN  THE  STATEMENT  DIRECT  TO  THE  ACCOUNTANT 


IN  ACCOUNT  WITH 

THE  CANADIAN  BANK  OF  COMMERCE 

. MONTH  OF 


KINDIY  NOTIFY  THE   BANK  OF  ANY  OHANQE  Or  ADDRESS 

MONTH  OF 

■.No.  ol 
Items 
Paid 

CHECSS 

CHECES 

CHECKS 

CHECKS 

DAT.    DEPOSITS      ■ 

BALANCS 

1 

2 
3 

4 
5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

ir 

18 
19 
20 
21 
22 
23 
24 

BALANCE 
BROUGHT  FORWARD 

25 

26 
^7 

Balance 
Credit 

INDEX  TO  abbreviations: 
D  Discount*  Credited        L  List  of  Checks  Debited 
C  Collections  Credited      1  Interest 
R  Returned  Items 


_VOUC,H'ERS  RETURNED 


Figure  37 


file  of  statements.  Thus  the  active  and  inactive  ac- 
counts for  the  day  are  separated  without  disturbing 
the  alphabetical  or  numerical  arrangement.  It  is 
therefore  a  simple  matter  to  make  a  comparison  of 


DEPOSIT  BUSINESS  217 

the  statement  files  with  the  relative  ledger  balance  if 
desired.  Where  the  employment  of  a  special  state- 
ment clerk  is  not  warranted,  stcitements  can  be  made 
up  at  regular  intervals  instead  of  daily,  but  the  work 
should  be  so  arranged  that  the  entries  for  only  one 
day  should  be  necessary  at  the  end  of  the  month. 

The  pass-book  is  still  used  in  connection  with  state- 
ment accounts,  but  simply  as  a  receipt  for  deposits 
to  the  customer.  A  special  form  is  generally  used 
with  provision  for  deposit  entries  only. 

Pass-books  will,  of  course,  continue  to  be  used  for 
certain  accounts,  but  the  envelop  system  can  be  used 
to  advantage  for  small  accounts.  An  envelop  spe- 
cially ruled  with  a  progressive  balance  is  kept  entered 
up  from  the  ledger  or  vouchers,  the  checks  being  en- 
closed as  entered.  With  the  exception  of  perhaps  a 
few  entries,  the  statement  is  always  ready  to  be 
handed  to  the  customer  as  opportunity  offers.  This 
method,  combined  with  the  statement  system,  is  of 
great  assistance  in  relieving  the  vaults  of  an  accumu- 
lation of  checks  and  vouchers. 

REVIEW 

What  precautions  are  taken  upon  opening  an  account?  Who 
approves  the  opening  of  a  new  account? 

What  provisions  are  made  in  the  case  of  professional  partner- 
ships?    Of  joint  stock  companies? 

To  what  extent  can  the  bank  guard  against  fraud  ? 

How  is  interest  on  savings  accounts  computed  ? 

What  is  the  value  of  the  monthly  statement  system? 


CHAPTER  VI 

LOANING  A  BANK'S  MONEY 

1.  Experience  the  only  teacher. — ^David  Harum's 
definition  of  banking,  "Loaning  your  money  and  get- 
tin'  it  back"  presents  the  gist  of  this  chapter  in  a  few 
words. 

A  bank  must  naturally  expect  to  make  some  losses 
in  its  business  but  discrimination  in  making  loans  will 
reduce  these  losses  to  a  minimum.  The  avoidance  of 
losses  is  seldom  a  matter  of  good  fortune,  but  rather 
of  good  judgment,  and  the  time  to  avoid  a  bad  debt  is 
when  the  paper  is  offered  for  discount. 

The  abilitA^  to  recognize  the  difference  between  a 
good  loan  and  a  poor  one  cannot  be  acquired  from 
books  or  even  from  personal  teaching;  it  can  only  be 
gained  from  experience  supplemented  by  other  neces- 
sary qualifications.  True,  there  are  certain  funda- 
mental principles  to  observe  in  analyzing  any  account, 
but,  outside  of  these,  no  two  accounts  can  be  judged 
exactly  alike;  conditions  are  too  varied. 

Certain  qualifications  are  essential  to  a  manager  in 
loaning  money.  He  must  be  a  man  of  pleasing  ad- 
dress, able  to  meet  with  and  draw  out  from  men  the 
information  he  desires,  and  above  all  must  be  able  to 
say  no  without  giving  undue  offense.  He  should 
have  a  fair  knowledge  of  accounting,  so  as  to  be  able 

218 


LOANING  MONEY  219 

to  read  between  the  lines  of  a  statement,  or  detect  a 
discrepancy.  He  should  have  a  good  memory,  sup- 
plemented by  a  record  of  all  essential  information  ob- 
tained verbally  from  a  customer.  As  a  rule,  it  is  bad 
policj^  to  take  notes  during  a  conversation,  as  it  is 
likely  to  restrain  a  customer  from  giving  information 
freely. 

Credit  has  been  defined  as  "A  question  of  ability  to 
pay  coupled  with  an  intention  to  pay."  Both  ability 
and  intention  must  be  assured  in  order  that  the  loan 
may  be  considered  a  safe  proposition;  the  latter  of 
these  requisites  is  one  that  must  be  settled  on  the  basis 
of  past  experience,  habits  of  life,  character  and  the 
like.  If  a  man  has  always  paid  his  debts  and  is  not 
living  beyond  his  means  his  intention  to  pay  would 
be  practically  assured.  The  ability  to  pa}^  however, 
is  another  matter  and  much  more  difficult  to  deter- 
mine. 

There  are,  therefore,  certain  facts  that  a  manager 
must  know  in  order  to  determine  whether  or  not  tlie 
bank  will  be  willing  to  extend  credit  to  a  borrower : 

( 1 )  Antecedent  and  character  of  a  borrower 

(2)  Nature  of  the  business 

(3)  Organization 

(4)  Competition 

(5)  Business  methods 

(6)  Outside  opinion 

(7)  Net  worth. 

In  addition  to  this  general  information  the  manager 
should  know  what  kind  of  transaction  every  piece  of 


220  BANKING  PRACTICE 

paper  discounted  by  him  represents,  and  should  make 
a  practice  of  putting  the  following  questions  to  him- 
self: 

1.  For  what  purpose  is  the  bank's  money  to  be  used? 

2.  Is  the  loan  safe:  would  I  lend  my  own  money  on  the 
security  offered? 

3.  Is  it  a  transaction  that  the  bank  should  undertake  to, 
or  which  can  legally  or  morally  become  a  party? 

4.  Will  the  money  be  used  for  the  purpose  for  which  it  is 
borrowed? 

5.  Will  the  paper  be  met  at  maturity,  and  from  what 
source? 

6.  Would  the  indorser  be  able  to  pay  the  amount,  if 
called  upon  to  do  so,  without  seriously  impairing  his  means? 

To  sum  up,  is  the  transaction  a  good  banking  prop- 
osition? If  all  these  questions  can  be  answered  satis- 
factorily, and  are  corroborated  by  an  analysis  of  the 
borrower's  statement,  the  manager  is  in  a  position  to 
discount  the  paper  if  within  his  discretionary  limits, 
or  otherwise  to  recommend  the  loan  to  the  head  office 
for  authorization. 

A  simple  rule  is  never  to  give  out  the  bank's  money 
without  having  rational  or  common  sense  reasons  for 
knowing  that  it  can  be  repaid  within  a  reasonable 
time.  It  is  the  first  principle  of  banking  science  that 
money  must  not  be  locked  up  in  land,  buildings,  mines 
or  similar  non-banking  ventures,  or  so  loaned  that  it 
can  only  be  paid  out  of  future  profits  by  being  trans- 
ferred to  another  bank. 

2.  Causes  of  failure  in  business. — A  study  of  the 


LOANING  MONEY  221 

principal  causes  of  business  failures  may  be  useful  in 
demonstrating  the  relative  importance  of  the  various 
factors  of  weakness.  The  accumulated  experience  of 
many  years  has  been  shown  by  Bradstreet's  to  prove 
that  a  large  number  of  failures  occur  because  of  de- 
ficiencies in  the  traders  themselves,  rather  than  be- 
cause of  happenings  beyond  their  immediate  con- 
trol. In  Bradstreet's  Journal  for  January  25,  1912, 
eight  leading  causes  were  grouped  under  the  first 
heading,  while  only  three  were  given  as  existing  apart 
from  the  individuals  themselves.  These  causes  are  as 
follows  in  the  order  of  their  importance : 

A. — Due  to  faults  of  those  fnilmg:  , 

1.  Lack  of  capital 

2.  Incompetence  (irrespective  of  other  causes) 

4.  Fraudulent  disposition  of  property ; 

5.  Inexperience  (without  other  incompetence) 

6.  Neglect  of  business  (due  to  doubtful  habits) 

7.  Unwise  granting  of  credits 

10.  Personal  extravagance 

11.  Speculation  (outside  of  regular  business) 

B. — Not  due  to  faults  of  those  failing: 

3.  Specific   conditions    (disaster,  prolonged  sickness, 

etc.) 

8.  Competition 

9.  Failure  of  others  (of  apparently  solvent  debtors). 

In  1912,  30.3  per  cent  of  the  nimiber  of  failures  and 
80  per  cent  of  the  liabilities  were  due  to  the  shortcom- 
ings of  those  who  failed.  Bradstreet's  gives  the  fol- 
lowing interesting  table : 


222 


BANKING  PRACTICE 


PERCENTAGES  OF  NUMBER  OF  FAILURES  AND  LIABILI- 
TIES  IN  THE   UNITED  STAES  AND  CANADA  IN   1911 
AND  1913 


CLASSIFIED  AS  TO  CAUSES 

United  states,  Peii Cent- 

Canada,  Pex  Cent 

Failures  Due  to 

Number 

Liabilities 

'Number 

Liabilities 

1912 

1911 

1912 

1911 

1912 

1911 

1912 

1911 

Lack  of  capital 

20.7 

30.2 

16.5 

10.3 

4.6 

2.0 

2.0 

1.9 

1.3 

.7 

.8 

31.4 
27.0 
16.9 
10.6 
4.1 
2.2 
5.0 
2.9 
1.3 
.9 
.7 

33.5 

2G.8 

13.8 

8.8 

3.0 

1.0 

2.6 

'1.3 

4.9 

.9 

3.4 

28.3 
23.5 
20.7 
8.9 
2.2 
1.3 
2.2 
4.8 
4.2 
1.2 
2.7 

50.3 

16.3 

12.8 

6.7 

5.1 

'4.3 

1.3 

1.0 

.9 

'.8 

.5 

49.3 

16.1 

14.6 

8.1 

2.9 

4.1 

.9 

.1.1 

1.1 

.9 

.9 

45.8 

22.8 

8.8 

10.3 

3.5 

3.1 

^1.7 

.6 

2.5 

.5 

.4 

47.8 

;i8.9i 

IncomDetence 

Specific  conditions 
Fraud 

10.1, 
'9  9! 

Inexperience 

'15' 

Nefflecf; 

25t 

Unwise  credits 

1.0 

Oomnetltion 

6' 

Failures  of  others 

1.4' 

F.xtxavaeance 

33 

Speculation 

3  1^. 

These  percentages  afford  much  interesting  and  in- 
structive information  and  point  definitely  to  the  more 
serious  ills  of  commercial  life. 

It  is  at  once  apparent  that  the  most  dangerous  fac- 
tor in  Canadian  business  life  is  the  lack  of  capital, 
which  is  responsible  for  over  50  per  cent  of  the  busi- 
ness failures.  The  lack  of  liquid  capital  is  one  of  the 
most  serious  difficulties  a  bank  manager  has  to  con- 
tend with,  and  he  must  ever  be  on  the  alert  for  its 
appearance.  It  is  a  condition  which  may  arise  at  any 
time.  For  instance,  a  loan  made  to  a  customer  os- 
tensibly for  the  creation  of  liquid  assets  may  be  im- 
properly diverted  into  building,  real  estate  or  other 
fixed  assets.     Lack  of  capital,  altho  the  apparent 


LOANING  MONEY  223 

cause  of  these  failures,  is  not  necessarily  the  primary 
condition,  but  may  arise  or  be  aggravated  by  any 
of  the  other  causes;  injudicious  buying,  for  instance, 
extravagance  in  living  or  speculation,  may  all  result 
in  this  condition,  without  showing  as  an  apparent 
factor  in  the  failure. 

Incompetence  shows  the  next  largest  percentage  in 
Canada  and,  combined  with  inexperience,  gives  a 
total  of  21.4  per  cent  in  number  and  26.3  per  cent  in 
liabilities.  These  particular  causes  assert  themselves 
in  various  ways:  injudicious  buying,  lack  of  organi- 
zation and  other  unwise  business  transactions.  It 
must  be  borne  in  mind  that  a  man  may  be  most  suc- 
cessful in  operating  a  small  business,  but  may  prove 
quite  unfit  to  handle  a  larger  one,  on  account  of  lack 
of  business  education. 

The  other  causes  are  self-evident  reasons  for  non- 
success  in  business  and  call  for  no  particular  com- 
ment. It  is  not  only  necessary  to  keep  these  causes 
of  failures  constantly  in  mind,  but  it  is  advisable  also 
to  watch  carefully  that  the  presence  of  these  causes  in 
an  account  of  the  least  importance  does  not  assume 
larger  proportions  or  induce  even  more  serious  con- 
ditions. 

3.  Statement  of  afairs. — Reference  has  already 
been  made  to  the  necessity  for  obtaining  a  knowledge 
of  a  borrower's  net  worth.  This  information  is  ar- 
rived at  by  an  analysis  of  the  business  statement 
which  is  required  from  all  customers  seeking  credit 
from  a  bank. 


224.  BANKING  PRACTICE 

Altho  the  practice  of  requiring  statements  from 
borrowing  customers  is  by  no  means  an  innovation  on 
the  part  of  banks,  it  is  only  of  late  years  that  it  has 
been  found  advisable  to  make  the  rendering  of  a 
statement  an  invariable  condition  of  lending  a  bank's 
money.  This  necessity  is  due  to  several  causes;  one 
is  the  rapid  expansion  of  the  country  and  the  opening 
up  of  branches  in  new  territories ;  another  is  the  grad- 
ual elimination  of  the  personal  element  in  modern 
business  life,  due  to  the  incorporation  of  old-estab- 
lished firms  into  joint  stock  companies,  a  shareholder 
in  which  has  only  the  amount  of  his  investment  in  the 
company  at  stake,  and  not  his  whole  fortune  and  the 
honor  of  the  family  name.  The  principal  reason, 
however,  is  no  doubt  a  response  to  the  constant  de- 
mand for  efficiency  and  thoroness  in  all  branches  of 
business  life.  The  granting  of  commercial  credits, 
as  the  keystone  of  the  whole  structure,  has  been  raised 
almost  to  the  dignity  of  a  profession.  The  excellent 
work  accomplished  by  the  various  credit  men's  asso- 
ciations in  the  United  States  ^  has  naturally  extended 
its  influence  to  Canada,  and  practically  every  business 
house  of  any  importance  has  its  own  credit  depart- 
ment doing  invaluable  work.^ 

iMuch  credit  is  due  to  the  late  Mr.  James  G.  Cannon,  President  of 
the  Fourth  National  Bank  of  New  York,  to  whose  unremitting  efforts  in 
arousing  public  interest  in  this  question  may  be  ascribed  the  present  high 
standard  of  credit  requirements  in  the  commercial  world.  Mr.  Cannon  is 
the  author  of  many  interesting  and  exhaustive  articles  and  addresses  on 
the  subject  of  commercial  credit,  and  he  was  instrumental  in  having  the 
banks  and  credit  associations  thruout  the  United  States  adopt  a  uniform 
statement  blank. 

2  The    Canadian    Credit    Men's    Association,    altho    only    started    in 


LOANING  MONEY  225 

In  analyzing  a  statement  it  is  well  to  bear  in  mind 
the  old  saying  that  "A  man  tells  his  hopes  to  his 
banker  and  his  fears  to  his  lawyer,"  and  fm'ther,  that 
a  statement  of  affairs  is  often  an  expression  of  opin- 
ion rather  than  a  statement  of  facts. 

In  the  course  of  one  of  his  addresses  on  "Bank 
Credits,"  Mr.  Cannon,  in  an  interesting  and  instruc- 
tive way,  remarked  on  the  necessity  of  an  analyzed 
statement  in  loaning  money: 

The  cornerstone  of  credit  may  be  said  to  be  the  requiring 
from  borrowers  of  statements  of  the  condition  of  their  af- 
fairs. This  has  now  become  an  accepted  custom  in  the  re- 
lation between  banks  and  borrowers  on  commercial  paper. 
It  has  come  to  be  recognized  that  the  practice  is  of  value  to 
both  the  bank  and  the  borrower,  and  this  may  be  considered 
the  reason  for  its  success.  Furthermore,  the  making  of 
statements  oftentimes  renders  concerns  themseh^es  aware  of 
their  weaknesses  in  their  methods  of  operation,  financial 
practices  and  results  of  business.  The  banker,  having  a 
substantial  interest  in  the  success  of  the  customer,  may  fre- 
quently give  wholesome  advice  or  timely  warning  from  his 
wide  experience  in  commercial  affairs  and  his  foresight  in 
monetary  matters. 

A  statement,  however,  which  is  not  submitted  to  anal3'sis 
is  a  menace.  Because,  first,  if  errors  have  been  made,  if 
lack  of  judgment  on  the  part  of  the  management  of  the 
concern  has  been  shown  which  is  not  brought  to  the  atten- 
tion of  the  borrower,  if  reckless  methods  have  been  indulged 
in  or  any  dishonesty  has  been  practised,  the  very  fact  that 
a  statement  has  been  received  and  accepted  by  a  banker 
either  lulls  into  a  sense  of  security  the  careless  or  heedless 
borrower,  confirms  the  reckless  financial  habit  or  establishes 
the  dishonesty,  if  such  exists.     Frank  and  open  statements, 

Winnipeg  in   1910,  has   extended   its  organization   thruout  Canada  and 
has  already  accomplished   much  excellent  work. 
XVI— 16 


^26  BANKING  PRACTICE 

bearing  upon  their  face  the  evidence  of  a  true  condition  of 
affairs,  are  the  greatest  factors  in  establishing  credit. 
Nothing  will  more  firmly  cement  the  union  between  borrower 
and  banker  than  such  a  statement,  and  nothing  will  be  of 
more  value  to  a  banker  and  of  less  harm  to  an  honest,  enter- 
prising borrower.  Hidden  facts  are  revealed  by  analysis, 
and  skill  in  reading  between  the  lines  is  an  important  part 
of  a  manager's  training.  By  this  means,  weaknesses  may 
frequently  be  discovered  and  proper  steps  taken  to  avert 
trouble  before  acute  difficulty  arises. 

A  large  number  of  statements  will  show  on  their  face  such 
evidence  of  weakness  as  to  require  no  further  investigation. 
This  information,  of  course,  is  valuable  to  bankers,  and 
they  will  at  once  decline  to  extend  these  applicants  any  ac- 
commodation; whereas,  if,  on  the  other  hand  they  were  only 
in  possession  of  indefinite  data,  they  might  be  disposed  to 
extend  a  line  of  credit. 

Many  old  firms,  because  they  have  been  in  the  habit  of 
conducting  their  business  without  revealing  their  financial 
affairs  to  any  one,  feel  a  natural  reluctance  to  making  a 
statement  of  their  condition ;  but  we  should  bear  in  mind 
the  fact  that  great  and  deplorable  mistakes  have  been  made 
by  banks  in  granting  large  lines  of  credit  to  old  houses  sim- 
ply because  they  had  an  unblemished  record  and  were  sup- 
posed to  be  entitled  to  liberal  consideration. 

Notes,  bills,  drafts,  checks,  book  credits,  or  any  form  of 
obligation  resulting  from  a  credit  transaction,  come  into 
existence,  not  antecedent  to,  but  as  a  consequence  of,  a 
transfer  of  goods  involving  futurity.  Paper  is  purely  fic- 
titious and  illegitimate  which  is  not  the  outcome  of  an  opera- 
tion in  goods ;  and  we  are  enabled  to  test  whether  loans  are 
legitimate  or  not  according  as  we  know  whether  the  dis- 
counts are  granted  or  not  for  actual  transfers  of  salable 
goods.  This  test  gives  us  the  means  of  drawing  the  line 
between  sound  and  unsound  banking. 

The  manager  as  a  rule  trusts  too  much  to  his  customer — 
if  the  latter  wants  money,  presumably  he  is  an  ordinarily 
prudent  man,  and  knows  what  to  do  with  it;  he  must  know 


LOANING  MONEY  227 

his  own  business  better  than  his  banker,  and  it  would  be 
presumptuous  in  the  latter  to  undertake  to  guide  him. 
While  this  may  be  true  of  the  well-trained  and  experienced 
merchant,  it  is  very  wide  of  the  truth  with  hundreds  of 
traders  and  small  manufacturers  all  over  the  country. 
There  are  really  very  few  men  anywhere  who  can  be  trusted 
to  handle  prudently  and  safely  unstinted  loans  of  money. 
The  proverb  "Give  him  rope  enough  and  he  will  hang  him- 
self" fitly  illustrates  the  tendency  of  the  average  trader  to 
get  into  difficulty  when  he  is  too  freely  provided  with  money. 

With  careful  and  prudent  banking,  however,  much  of  the 
mischief  would  be  prevented.  Inflation  is  seldom  developed 
to  a  very  great  extent  without  accommodation  loans,  and 
these  would  be  very  sparingly  indulged  in  if  not  altogether 
avoided. 

Credits  would  be  carefully  scanned  and  risks  divided ;  and 
so  the  skilful  banker,  by  simply  following  safe  rules  in  his 
own  business — rejecting  here  and  encouraging  there — can- 
not help  saving  his  customers  as  well  as  himself  from  much 
trouble  and  loss.  But  in  order  to  do  this  well  he  must  be  a 
man  who  thoroly  knows  his  business ;  of  strong  self-reliance, 
a  man  who  arrives  at  his  opinions  and  judgments  from  ob- 
served facts,  not  from  hearsay,  and  who  is  not  to  be  fright- 
ened into  altering  his  course  to  suit  importunate  and  perhaps 
influential  borrowers. 

4.  Science  of  credit. — The  following  analysis  of  the 
principles  and  rules  which  govern  a  credit  man  in  his 
work  were  suggested  by  Mr.  Cannon : 

PRINCIPLES  : 

1.  To  reduce  losses 

2.  To  eliminate  disproportionate  risks 

3.  To  conserve  worthy  interests 

4.  To  war  on  dishonesty  and  incompetence. 

MECHANISM  : 

1.  The  statement  of  condition,  including: 
Assets  and  liabilities 


228  BANKING  PRACTICE 

Annual  business  or  turnover 
Net  result  of  business 
Bad  debts 

Commercial  expenses 
Character  and  antecedents 
Special  trade  conditions. 
2.  The  analysis  and  study  of  the  above. 

GUIDING   RULES  : 

1.  Quick  assets  only  are  a  basis  for  loans 

2.  Fixed  assets  only  considered  as  giving  an  unknown 
support  to  the  quick  assets 

3.  The  debt  limit  of  the  borrower  has  been  exceeded 
when  his  liabilities  exceed  50  per  cent  of  his  quick  assets 
(the  so-called  50  per  cent  credit  rule) 

4.  It  should  always  be  borne  in  mind  that  there  is  a 
cardinal  difference  between  banking  credit  and  other  kinds 
of  commercial  credit;  you  can  afford  to  run  much  less  risk 
in  banking  than  in  commerce  and  therefore  you  must  take 
much  greater  precautions. 

5.  Form  of  statement. — Altho  for  many  reasons 
it  is  preferable  to  have  a  statement  rendered  on  one 
of  the  standard  forms  supplied  by  a  bank,  the  main 
object  is  to  obtain  information,  and  frequently  a 
statement  made  up  by  a  customer  along  his  own  lines 
may  disclose  weakness  which  a  more  formal  state- 
ment might  not  reveal.  Figure  38  is  a  comprehen- 
sive form  combining  both  a  statement  and  an  appli- 
cation, and  is  adapted  to  the  statements  of  private 
individuals,  firms  and  corporations.  It  will  be  noted 
that  each  partner  of  a  firm  is  required  to  sign  the 
statement  and  application. 

The  statement  generally  submitted  to  a  bank  is 
the  annual  statement  of  the  customer's  affairs.     This 


LOANING  MONEY  229 

should  be  made  at  the  end  of  his  fiscal  year,  when  his 
merchandise  and  raw  material  accounts  are  at  their 
lowest,  and  his  bank  loans  cleaned  up. 

In  any  business  there  should  be  at  least  one  period 
in  the  year  when  the  direct  indebtedness  to  the  bank  is 
fully  paid  up.  This  is  of  vital  importance  both  to 
the  bank  and  the  customer.  Under  normal  condi- 
tions inability  to  clean  up  bank  loans  annually  points 
to  a  lack  of  working  capital,  which  may  be  due  either 
to  the  gradual  change  of  quick  assets  into  fixed  as- 
sets, or  to  injudicious  buying  or  selling.  To  allow 
this  condition  to  become  chronic  is  fatal;  it  should  be 
remembered  that  50  per  cent  of  the  failures  in  Can- 
ada are  due  to  lack  of  capital. 

A  brief  comment  on  the  information  called  for  by 
the  statement  shown  in  Figure  38  will  be  instructive. 
It  must  first  be  noted  that  what  are  called  "quick  as- 
sets" consist  of  cash,  receivables  and  merchandise, 
while  "current  liabilities"  include  practically  all  in- 
debtedness except  mortgages.  The  ratio  of  liabili- 
ties to  quick  assets  is  usually  the  first  test  of  the 
statement.  The  two  totals  are  therefore  in  line  with 
each  other  for  purposes  of  quick  comparison.  Ex- 
cept in  certain  businesses  such  as  lumber,  grain  or 
other  staples,  the  liabilities  should  not  exceed  50  per 
cent  of  the  quick  assets,  and  as  a  rule  the  former 
should  not  exceed  the  cash  and  receivables,  thus  leav- 
ing the  amount  of  merchandise  on  hand  to  represent 
working  capital. 

6.  Cash. — The  cash  on  hand  should  always  be  a 


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234,  BANKING  PRACTICE 

comparatively  small  amomit.  If  large,  the  reason 
should  be  inqmred  into,  as  this  means  either  careless- 
ness in  financing  or  that  some  worthless  note  or  bon  is 
carried  as  cash.  Practically  all  the  cash  on  hand 
should  be  carried  in  the  bank,  and  the  balance  main- 
tained should  be  commensurate  with  the  amount  of 
work  which  the  account  involves  to  the  bank. 

Comparison  should  be  made  with  the  bank  ledger 
on  the  same  date,  and  if  outstanding  checks  have  been 
allowed  for  by  an  entry  on  the  liability  side  of  the 
statement,  the  amount  should  agree,  otherwise  the 
deposit  ledger  balance  will  be  the  larger;  if  the  re- 
verse, the  reason  should  be  inquired  into. 

7.  Merchandise. — Stock  on  hand  or  merchandise 
calls  for  most  careful  consideration  and  analysis. 
Old  and  unsalable  stock  accmnulates  rapidly,  espe- 
cially under  poor  management,  and  even  if  the  stock 
is  reasonably  new,  its  amount,  if  out  of  proportion 
to  the  total  sales,  may  be  a  burden  to  the  business 
and  i^rove  a  source  of  weakness.  It  is  important  to 
know  if  the  figures  are  the  result  of  actual  inventory 
at  cost  price,  and  also  on  what  basis  old  or  unsalable 
goods  have  been  included.  In  revaluing  the  mer- 
chandise for  credit  purposes  due  consideration  must 
be  given  to  the  nature  of  the  business.  A  deduction 
of  10  per  cent  is  generally  sufficient  for  staples  such 
as  groceries,  provisions,  iron  and  leather,  while  on 
goods  partaking  of  the  nature  of  luxuries,  or  depend- 
ing for  their  sale  on  changing  fashions  or  seasons, 
there  should  be  a  much  heavier  discount.     It  is  always 


LOANING  MONEY  235 

advisable  to  look  over  the  stock  as  occasion  offers. 
Another  good  plan  is  to  keep  a  record  of  the  result 
of  local  liquidation  sales  of  goods  and  receivables; 
no  better  object  lesson  can  be  found  as  to  the  reali- 
zable values  of  different  kinds  of  merchandise. 

In  a  manufacturing  business  it  is  necessary  to  know 
the  several  values  of  raw  materials,  finished  goods 
and  goods  in  process  of  manufacture.  Raw  material 
if  not  too  much  broken  in  bulk  is  worth  within  10  or 
15  per  cent  of  the  cost.  Finished  goods,  if  ready  for 
shipment,  should  be  worth  actual  manufacturing  cost, 
but  unfinished  goods  should  only  be  considered  to 
the  extent  of  the  goods  actually  in  process  of  manu- 
facture, as  established  by  the  ratio  between  the  daily 
and  total  annual  output.  Any  balance  over  this 
amount  should  be  inquired  into,  as  under  this  heading 
are  often  inventoried  parts  of  articles  whose  manu- 
facture has  been  discontinued. 

The  amount  of  merchandise  in  a  business  should 
form  a  reasonable  proportion  of  the  annual  turnover. 
Conditions  vary  in  different  trades  and  localities,  and 
it  is  impossible  to  establish  any  standard.  Roughly 
speaking,  however,  the  turnover  of  a  business  should 
be  two  and  one-half  to  three  times  the  working 
capital. 

Ample  insurance  is  necessary  in  any  business. 
Whether  a  bank  is  interested  or  not,  every  customer 
should  be  advised  of  the  wisdom  of  keeping  fully  in- 
sured. If  the  insurance  is  assigned  to  the  bank  the 
schedule  should  be  compared  with  the  annual  state- 


236  BANKING  PRACTICE 

ment,  and  all  the  conditions  of  the  policy  carefully 
examined. 

8.  Bills  and  accounts  receivable. — Bills  receivable 
in  the  statement  of  a  Canadian  merchant  are  generally 
few  in  nmnber,  as  practically  all  his  trade  paper  is 
discomited,  or  else  left  with  the  bank  for  collection. 
With  the  facilities  offered  by  the  banks  there  is 
scarcely  any  object  in  holding  paper  in  the  office. 
Under  these  circumstances  a  large  amount  of  bills 
receivable,  in  excess  of  collection  held  by  the  bank, 
should  be  looked  into,  as  it  probably  means  an  ac- 
cumulation of  past  due  or  worthless  paper  or  else 
some  special  transactions  which  should  be  disclosed. 

Accounts  receivable  should  be  inquired  into,  espe- 
cially as  to  the  method  of  allowing  for  bad  and  doubt- 
ful debts.  A  distinction  is  made  in  the  statement 
between  receivables  for  goods  sold  and  receivables 
from  other  sources.  Loans  to  officers,  relatives  and 
friends,  and  other  irregular  transactions  are  fre- 
quently found  in  the  latter. 

Receivables  should  bear  a  reasonable  ratio  to  the 
turnover  and  goods  on  hand.  This  ratio,  of  course, 
would  vary  in  different  trades  according  to  the  terms 
of  sale.  A  business  selling  on  ninety  days'  time 
would  naturally  show  a  higher  proportion  of  receiv- 
ables than  a  business  selling  at  thirty  days. 

9.  Machinery  and  fixtures. — Real  estate,  machin- 
ery and  fixtures  are  known  as  fixed  assets  and  should 
only  be  considered  as  offering  an  unkno^Mi  support 
to  quick  assets.     In  fact,  real  estate  should  be  practi- 


LOANING  MONEY  237 

cally  ignored  unless  a  direct  and  steady  revenue  is 
derived  therefrom.  In  other  words,  real  estate 
should  be  looked  upon  only  as  something  to  fall  back 
upon  in  case  of  need  and  never  considered  as  a  basis 
for  a  bank  loan. 

In  a  manufacturing  business  both  buildings  and 
machinery  are  constantly  being  converted  into  goods, 
and  proper  allowance  for  depreciation  should  be 
made  each  year  out  of  profits. 

If  the  premises  are  rented  they  should  be  suitably 
located  for  the  business,  and  the  rent  paid  should 
be  in  proportion  to  the  business  done.  Much  de- 
pends, however,  on  the  nature  of  the  business  itself. 
A  drug  or  tobacco  business  could  afford  to  pay  a 
large  rental  for  a  corner  store  because  of  the  quick 
turnover  for  cash.  The  same  rent,  however,  might 
ruin  a  more  profitable  business  with  a  slower  turn- 
over. 

Where  the  premises  are  owned  outright  the  rental 
test  should  be  applied  on  a  basis  of  interest  and  taxes. 
If  the  valuation  of  the  owner  is  higher  than  the  busi- 
ness can  stand  on  a  reasonable  rental  basis,  the  valu- 
ation is  either  excessive,  or  the  business  should  be 
moved  elsewhere  and  the  property  sold.  The  owner 
must  acknowledge  either  overvaluation  or  poor  busi- 
ness judgment,  if  he  continues  to  do  business  at  a 
more  expensive  stand  than  his  business  warrants. 

The  value  of  the  real  estate  as  security  is  the  price 
for  which  it  can  be  sold  at  a  forced  sale.  If  the  holder 
of  a  mortgage  has  to  foreclose,  the  property,  altho 


238  BANKING  PRACTICE 

seemingly  desirable  and  well  situated,  depreciates 
enormously,  a  result  which  is  intensified  if  the  mort- 
gage is  to  a  bank.  Experience  shows  that  a  large 
sum  is  consumed  for  overdue  interest,  legal  expenses, 
commissions  and  the  like;  this  should  be  taken  into 
account  in  estimating  the  real  value  of  such  an  asset 
as  a  means  of  paying  off  indebtedness. 

10.  Current  liabilities. — Current  liabilities  gener- 
ally consist  of  amounts  due  the  bank  and  the  whole- 
sale trade  for  goods  purchased.  If  due  to  any  other 
creditors  the  circumstances  should  be  explained.  As 
already  stated,  amounts  due  to  the  bank  should  be 
cleaned  up  at  least  once  each  year  either  by  cash  or 
trade  paper  discounted. 

The  observance  of  a  borrower's  daily  transactions 
and  a  critical  scrutiny  of  his  liability"  account  from 
time  to  time,  and  one  year  with  another,  should  reveal 
whether  he  is  progressing  or  otherwise. 

A  comparison  of  the  indirect  and  other  liability  of 
the  customer  on  the  books  of  the  bank  with  the 
amounts  shown  in  his  statement  will  sometimes  dis- 
close an  omission  in  the  latter.  In  one  instance,  a 
branch  held  for  collection  from  other  banks  more 
than  double  the  amount  of  the  bills  given  in  a  state- 
ment. Needless  to  say  the  account  was  not  enter- 
tained. 

Where  amounts  are  due  to  other  than  trade  credi- 
tors, such  as  members  of  the  firm,  relatives  and  em- 
ployes, it  is  a  disturbing  feature,  as  such  loans  are 
liable  to  be  given  first  consideration  in  case  of  trouble. 


LOANING  MONEY  239 

Should  the  account  be  at  all  weak  in  other  respects, 
postponements  of  claim  to  the  bank  should  be  ob- 
tained from  such  creditors. 

11.  31  ortgages  and  other  factors.  —  Mortgages 
should  invariably  be  shown  as  a  liability,  and  the 
relative  real  estate  as  an  asset.  The  equity  alone 
should  never  be  considered.  The  position  of  a  mort- 
gage in  regard  to  taxes,  interest  and  insurance  will 
frequently  warrant  examination. 

It  is  very  important  that  all  contingent  liabilities 
should  be  given,  such  as  trade  paper  discounted  and 
paper  indorsed  or  guaranteed.  Such  obligations,  if 
not  disclosed  and  allowed  for,  will  always  be  a  source 
of  menace. 

It  is  useful  to  know  the  amount  and  disposition  of 
life  insurance  in  force  and,  in  the  province  of  Que- 
bec, the  amount  of  the  marriage  contract  is  material 
information,  as  the  latter  ranks  prior  to  an  unsecured 
liability. 

The  information  called  for  by  the  reverse  side 
of  the  statement  figure  No.  38  (pages  232,  233)  is 
self-explanatory,  and  is  pertinent  to  the  consideration 
of  an  application. 

Every  borrowing  customer  should  provide,  in  his 
will,  power  to  his  executors  to  continue  his  business 
after  his  death  until  it  can  be  profitably  liquidated. 
If  a  firm,  the  partnership  agreement  should  contain 
a  similar  provision;  otherwise  the  business  must  be 
liquidated  without  the  expenditure  of  further 
moneys.    In  many  cases  this  would  entail  heavy  loss 


240  BANKING  PRACTICE 

and,  if  the  bank  were  interested,  the  safety  of  its 
loans  would  be  endangered. 

Where  a  firm  or  corporation  operates  branch  offices 
great  care  should  be  taken  to  see  that  no  cross  draw- 
ing or  sales  are  allowed  to  swell  the  assets.  Many 
losses  have  been  made  thru  the  careless  scrutiny  of 
branch  operations,  especially  where  a  branch  carries 
a  deposit  account  at  a  local  bank.  Check  kiting  is 
one  of  the  first  symptoms  of  the  disease ;  others  quickly 
follow. 

12.  Sundry  information. — No  statement  can  be  an- 
alyzed by  rule  of  thumb.  The  points  brought  out  in 
this  chapter  are  by  way  of  suggestion  only.  To 
many  accounts,  of  course,  they  would  not  all  be  ap- 
plicable. No  unfavorable  fact,  however,  is  too  unim- 
portant to  be  overlooked  and  a  competent  manager 
is  constantly  adding  to  his  knowledge  and  developing 
his  power  of  drawing  inferences  and  making  deduc- 
tions. At  the  risk  of  repetition  the  following  ques- 
tions are  given  and  may  be  found  helpful  in  reahzing 
the  varieties  of  causes  which  contribute  to  the  forma- 
tion of  a  borrower's  credit  standing. 

Are  the  borrower's  antecedents  and  character  good? 

Are  his  personal  drawings  from  the  business  large? 

Has  he  ever  failed  or  had  a  suspicious  fire? 

Is  he  well  liked  and  respected  in  the  community? 

Does  he  kite  notes  or  checks? 

Is  he  in  good  health?     His  age? 

Is  he  what  is  known  as  a  "rebater,"  a  man  who  makes  un- 
fair claims  for  goods  in  the  hope  of  getting  rebates  or  other 
concessions  ? 


LOANING  MONEY  241 

Can  reliance  be  placed  on  his  statements? 

What  are  his  personal  habits? 

How  does  he  spend  his  evenings? 

Has  he  technical  ability'  in  his  business? 

Are  his  books  properly  kept? 

Does  he  extend  credit  too  freely  or  without  discrimination  ? 

Does  he  cut  prices  ? 

Is  he  careful  and  discriminating  in  the  purchase  of  his 
stock  or  does  he  carry  an  unnecessarily  heavy  stock? 

Is  he  inclined,  to  dabble  in  outside  ventures  such  as  real 
estate  or  stocks? 

Does  the  business  depend  on  conditions  that  may  not  be 
permanent  ? 

Does  he  allow  his  machinery  to  become  out  of  date  and  in- 
efficient ? 

Does  he  study  the  particular  wants  of  his  trade  with  a 
view  to  meeting  public  demands? 

Are  his  accounts  receivable  and  bills  receivable  all  genuine 
collectible  accounts  or  are  they  padded  with  slow  or  worth- 
less paper? 

Does  he  take  advantage  of  all  trade  discounts? 

Are  his  sales  out  of  proportion  to  his  capital? 

Is  his  position  improving  year  by  year? 

Has  he  any  large  contingent  liability? 

Are  all  his  liabilities  given  in  the  statement? 

Are  his  profit  and  expense  accounts  in  proportion  to  his 
sales  ? 

Does  he  buy  his  raw  material  before  he  is  reasonably  sure 
of  the  amount  of  his  sales? 

Is  he  over-ambitious  and  anxious  to  extend  his  plant  out  of 
all  proportion  to  his  working  capital? 

Does  he  turn  his  capital  quickly,  or  as  many  times  as  his 
competitors  in  the  same  line  of  business? 

Does  he  always  plan  ahead  in  regard  to  his  financial  en- 
gagements, and  know  where  the  money  is  to  come  from? 

Has  he  made  provision  for  continuing  his  business  in  case 
of  death? 

Does  he  advertise  wisely? 

XVI— 17 


24^  BANKING  PRACTICE 

Is  the  line  of  goods  he  manufactures  or  sells  one  which  is 
easily  affected  by  changing  fashions  or  seasons? 

How  do  his  annual  sales  compare  with  his  stock  on  hand 
and  bills  payable   and  receivable   accounts? 

On  what  basis  is  the  inventory  taken  and  by  whom? 

Are  his  books  audited  by  a  chartered  accountant? 

18.  PrcjJaring  the  ap plication. — The  consideration 
of  a  customer's  statement  along  the  lines  suggested  in 
the  previous  sections  should  assist  a  manager  in 
promptly  deciding  whether  he  will  grant  a  loan  or 
not.  A  prompt  "no"  is  often  preferable  to  a  be- 
lated "y^"^*"  The  latter  implies  indecision.  The 
least  indication  of  weakness  in  the  statement  should 
not  be  overlooked.  The  margin  of  profit  in  bank- 
ing is  too  small  to  allow  imnecessary  risk  to  be  taken, 
and  the  bank  should  always  be  given  the  benefit  of 
the  doubt. 

A  reference  book  or  card  index  should  be  kept  on 
the  manager's  desk,  and  any  credit  information  about 
customers  and  others,  whether  borrowers  or  not, 
should  be  systematically  jotted  down. 

In  the  case  of  larger  firms  submitting  regular  state- 
ments, it  is  necessary  to  keep  a  careful  record  year 
by  year  of  the  changes  in  the  statements  and  course 
of  the  account.  It  is  advisable,  whether  the  account 
falls  within  the  manager's  discretionary  limits  or  not, 
to  do  this. 

When  a  loan  is  outside  the  manager's  discretionary 
limits  it  must  be  submitted  to  the  head  office  accom- 
panied by  a  definite  recommendation.  The  latter  is 
essential.     Therefore,  as  soon  as  the  manager  decides 


LOANING  MONEY  243 

that  a  loan  of  this  nature  is  desirable,  he  prepares  the 
statements  required  by  the  head  office  and  forwards 
them  with  his  letter.  Figm-e  39  gives  an  exact  copy 
of  a  customer's  statement  with  space  at  the  foot  for 
a  revaluation  of  the  assets  by  the  manager.  Fig- 
ure 40  provides  for  a  detailed  analysis  and  compari- 
son of  the  last  two  statements  on  file,  and  also  gives 
a  comparison  of  the  statements  for  the  past  five  or 
six  years.  The  course  of  the  liability  account  is  given 
for  the  past  year  with  sundry  other  information. 
The  course  of  the  deposit  account  should  also  be  re- 
ferred to. 

14.  The  apjjlication. — The  most  severe  test  of  a 
manager's  ability  and  soundness  of  judgment  is  found 
in  the  writing  of  a  letter  of  application.  The  rea- 
sons for  recommending  the  loan  should  be  concisely 
stated  and  no  pertinent  fact  omitted.  In  other  words, 
the  head  office  should  never  have  occasion  to  write 
back  for  further  information  or  missing  particulars. 

A  separate  letter  should,  of  course,  be  written  for 
each  account,  and  the  condition  of  the  liability  and 
security  at  the  moment  of  writing  should  be  set  forth 
at  the  head.  The  letter  should  further  give  a  concise 
statement  of: 

(a)  The  amount  of  credit  applied  for; 

(b)  The  purpose  for  which  the  advances  are  to 
be  used; 

(c)  When  the  advance  will  be  required; 

(d)  When  and  from  what  source  payment  is  ex- 
pected. 


Give  full  Name  or  Names  |  

of  Partners,  Age,  Buaiaess.f 
and  Residence.  ' 

STATEMENT  OF  THE  AFFAIRS  OF 


Item 
No. 


Per  cent 
deducted 

in  Mgr's 
valuations 


Sales  for  past  year- 
Losses 


s_ 

Insurance  ou  Liquid  Assets  S_ 
"  on  Fixed  Assets    §_ 

Real  Estate  Searclied 


MANAGER'S  ABSTRACT  OF  ABOVE. 
WITH  HIS  VALUATION  OF  ASSETS 


Liquid  ^Issets: 

Cash,  Bills  Receivable 
and  Accounts 


Merchandise  held  for 
Sale 


Miscellaneous  movable 
property. 


Fixed  Assets: 


Floating  Liabilities: 

To  Bank  Accounts  Payable. 
Bills  Payable. 


To  Sundry  Parties. 


Mortgage  Debts: 
Surplus- 


Liability  as  Endorser  or  Guar- 
antor not  included  above, 
namely  on: — 
Trade  Paper  in  Customer's 

Account $ 

On  other  Accounts  at 

Bi^anch $ 


On  other  Accounts  else- 
where  


Figure  39 
244 


Name  of  customer. 


COMPARISON  BETWEEN  ACCOMPANYING  STATEMENT 
AND  LAST  PREVIOUS  STATEMENT 


i 

As  per 

Last 

previous 

Statement 

Dated 

1<) 

As  per 

Present 

Statement 

Dated 

19 

Increase 

Decrease 

I/iquid  Assets: 

Total  Liqnifi  As'spts 

Net 

Net 

IFised  Assets: 

Mortgages  and  other  Investments 

Other  Real  Estate,  encumbered 

Total  FiTTPd  Assets 

Net 

Net 

Total  Afi"=Pts 

Deer 

ease 

Incr 

ease  ^ 

Floating  Liabilities: 

Rills  Pnynhle 

To  Rnnflry  Partips 

Total  FloatinBT.iahilttiPs 

Net 

Net 

'Mnrtg'n£fp  Dpbts! 

Total  Mortgage  ppiit« 

Net 

Net 

Tntnl  T.inhilitiPs 

Surplus: 

1 

i 

11          1 

Increase — Decrease  in  Liquid  Assets 

Increase— Decrease  in  Floating  Liabilities, 

Increase— Decrease  in  Liquid  Surplus 

Increase— Decrease  in  Fixed  Assets 

^Increase— Decrease  in  Mortgage  Debts 

Increase— Decrease  in  Total  Surplus 


19 

19 

19 

10 

19 

19 

T:ioating  Liabili- 
ties 

Xiquid  Surplus 
Fivpfl  Assets 

'Alnrtpnge  Dehts 

FixPd  Surplus 

^TntaX  Surplus 

I 

FiGUBE   40 

245 


246  BANKING  PRACTICE 

Sometimes  preliminary  letters  may  have  been 
written  giving  information  on  some  of  these  points, 
but  the  final  letter  should  nevertheless  contain  full 
particulars,  and  reference  to  previous  letters  or  state- 
ments should  not  be  made  merely  to  save  the  trouble 
of  repeating  information,  except  in  special  and  in- 
volved cases.  It  is  much  more  economical  in  time  and 
labor  for  a  branch  manager  to  set  forth  the  case 
fully,  rather  than  to  put  the  head  office  to  the  trouble 
and  delay  of  looking  up  references. 

The  reasons  leading  to  the  recommendation  and  any 
criticism  of  the  account  should  be  carefully  and  sys- 
tematically assembled  and  the  information  set  out  in 
due  order  and  sequence,  each  subject  being  discussed 
in  a  separate  clause,  and  all  to  be  said  on  a  particular 
subject  brought  together  in  one  place  as  far  as  pos- 
sible. This  can  only  be  accomplished,  as  a  rule,  by 
the  letter  being  first  drafted  and  carefully  corrected 
before  it  is  written.  If  the  application  is  from  a 
new  customer  the  cause  of  the  change  in  his  bank 
account  should  be  reported,  and  if  the  application  is 
for  a  line  of  trade  paper  a  list  of  the  trade  bills  under 
discount  with  his  previous  bank  should  accompany 
the  letter. 

If  these  simple  requirements  are  carefully  com- 
plied with,  the  head  office  will  be  in  a  position  to 
accord  a  prompt  authorization  or  otherwise  of  the 
application. 

15.  Guarantee's. — Guarantee  bonds  are  a  danger- 
ous form  of  security,  liable  to  be  voided  by  what  may 


LOANING  MONEY  247 

appear  to  be  a  most  trivial  incident  not  affecting  in 
any  way  the  equities  of  the  situation. 

A  special  form  used  by  banks  is  given  in  Figure 
41.  In  cases  where  a  guarantor  is  also  a  creditor 
of  the  borrower  it  is  generally  the  custom  to  obtain 
a  postponement  of  the  former's  claim  in  favor  of  the 
bank. 

It  must  be  borne  in  mind  that  a  bond  of  guarantee 
would  become  ineffective  in  all  such  cases,  even  if  the 
business  of  a  firm  or  individual  were  converted  into  a 
stock  company,  or  if  the  ownership  of  a  business 
changed,  altho  the  same  business  style  should  be  con- 
tinued. 

16.  Customers'  wills. — Under  ordinary  circum- 
stances and  speaking  generally,  the  business  in  which 
a  man  is  engaged  at  the  time  of  his  death  must  be 
liquidated  by  his  executors,  or,  if  he  is  a  member  of 
a  firm,  by  the  surviving  partners,  without  the  expen- 
diture of  further  moneys.  In  many  cases,  this  would 
entail  heavy  loss. 

For  this  reason,  it  is  very  desirable  that  every  bor- 
rowing customer  should  be  influenced  to  provide  in 
his  will  that  his  executors  be  empowered  to  continue 
his  business  after  his  death  until  it  can  be  profitably 
liquidated.  Deeds  of  partnership  should  also  make 
similar  provisions. 

The  borrowing  powers  of  executors,  if  they  have 
any,  are  determined  by  the  will  of  the  testator.  Upon 
the  decease  of  a  borrower  the  conditions  of  the  will 
should  be  ascertained,  and  unless  authority  is  specially 


GUARAXTEE    BOXD    AND    POSTPOXEMENT    OF    CLAIM 

To  THE  Manager 
BANK 

In  Consideration  of  The  Canadian  Bank  of  Commerce  agreeing  to 

deal  with herein 

referred  to  as  "the  customer,"  in  the  way  of  its  business  as  a  Bank, 
the  undersigned  herebj'  jointly  and  severally  guarantee  payment  to 
the  Bank  of  the  liabilities  which  the  customer  has  incurred  or  is 
under  or  may  occur  or  be  under  to  the  Bank,  whether  arising  from 
dealings  between  the  Bank  and  the  customer,  or  from  other  deal- 
ings by  which  the  Bank  may  become  in  any  manner  whatever  a 
creditor  of  the  customer;  (the  liability  of  the  undersigned  here- 
under   Ijeing   limited    to   the    sum    of dollars 

with  interest  from  the  date  of  demand  for  payment  of  the  same). 

And  the  undersigned  agrees  that  the  Bank  may  grant  extensions, 
take  and  give  up  securities,  accept  compositions,  grant  releases  and 
discharges,  and  otherwise  deal  with  the  customer  and  with  other  par- 
ties and  securities  as  the  Bank  may  see  fit,  and  may  apply  all 
moneys  received  from  the  customer  or  others,  or  from  securities, 
upon  such  part  of  the  customer's  indebtedness  as  it  may  think  best, 
without  prejudice  to  or  in  any  way  limiting  or  lessening  the 
liability  of  the  undersigned  under  this  guarantee. 

And'  this  guarantee  shall  apply  to  and  secure  any  ultimate  balance 
due  to  the  Bank,  but  the  Bank  'shall  not  be  bound  to  exhaust  its  re- 
course against  the  customer  or  other  parties  or  the  securities  it  may 
hold  before  being  entitled  to  payment  from  the  undersigned  of  the 
amount  hereby  guaranteed. 

And  that  this  shall  be  a  continuing  guarantee,  and  shall  cover  all 
the  liabilities  which  the  customer  may  incur  or  come  under  until  the 
undersigned,  or  the  executors  and  administrators  of  the  undersigned, 
shall  have  given  the  Bank  notice  in  writing  to  make  no  further  ad- 
vances on  the  security  of  this  guarantee. 

And  it  is  Agreed  that  this  guarantee  shall  be  good  notwithstanding 
any  change  or  changes  in  the  name  of  the  customer,  or  any  change 
or  changes  in  the  membership  of  the  customer's  firm  by  death  or  by 
retirement  of  one  or  more  of  the  partners,  or  by  the  introduction 
of  one  or  more  other  partners. 

Any  debts  or  claims  against  the  customer  now  held,  or  which  may, 
during  the  continuance  of  this  guarantee,  be  held  by  the  undersigned 
or  any  of  them  are  for  the  further  security  of  the  Bank,  and  as  be- 
tween the  undersigned  and  the  Bank  are  hereby  postponed  to  the 
delits  and  claims  against  the  customer  now  held  or  which  during  such 
continuance  may  be  held  by  the  Bank,  and  until  the  Bank  has  re- 
ceived payment  in  full  of  its  said  debts  and  claims  any  such  debts 
and  claims  of  the  undersigned  or  any  of  them  shall  be  collected, 
enforced  or  proved  subject  to  and  for  the  purpose  of  this  agree- 
ment, and  any  moneys  received  by  the  undersigned  or  any  of  them 
in  respect  thereof  shall  be  received  as  trustee  for  the  Bank  and 
shall  be  paid  over  to  the  Bank  on  account  of  its  said  debts  and 
claims. 

The  Guarantee  and  Agreement  on  the  part  of  the  undersigned 
herein  contained  shall  extend  to  and  enure  to  the  benefit  of  the  assigns 
of  the  Bank. 

Given  Under  Seal  at this dav  of 

A.  D.  191... 

Witness  : 

FlGTTBE   41 

248 


LOANING  MONEY  M9 

given  thereunder  the  executors  cannot  legally  borrow 
or  renew  any  note  which  may  be  running. 

17.  Power  of  attorney. — The  original  of  any  power 
of  attorney  should  be  permanently  lodged  with  the 
bank,  unless  it  has  been  filed  in  a  city  or  county 
registry  office,  in  which  case  a  certified  copy  under 
the  hand  and  ofiScial  seal  of  the  registrar  may  be 
accepted.  A  notarial  copy  of  a  power  of  attorney 
which  remains  in  the  hands  of  an  attorney  cannot  be 
acted  upon.  As  a  rule,  however,  the  powers  of  attor- 
ney are  executed  on  forms  provided  by  the  bank 
( Figures  42  and  43 ) .  A  power  of  attorney  must 
not  be  witnessed  by  the  party  in  whose  favor  it  is 
drawn  and,  as  a  general  rule,  should  be  delivered 
to  the  bank  by  the  grantor  and  not  by  the  attor- 
nej^ 

Where  an  instrument  is  executed  before  a  notary 
public  in  the  province  of  Quebec  and  the  original 
left  on  record  in  his  office,  a  copy  certified  by  the 
same  notarj^  may  be  accepted.  A  notary  in  the 
province  of  Quebec  is  a  public  officer  and  authorized 
to  act  as  a  depositary  for  such  documents. 

Bear  in  mind  always  that  the  authority  confeiTcd 
by  a  power  of  attorney  is  closely  circumscribed  to  the 
acts  which  it  specifies  by  the  most  strict  reading. 
Unless  specially  authorized  an  attorney  for  a  cus- 
tomer cannot  hypothecate  collateral  to  the  bank. 

An  overdraft  created  by  check  signed  by  an  attor- 
ney is  not  binding  w^ion  the  principal  unless  the  power 
of  attorney  granted  by  him  expressly  specifies  that 


POWER    OF    ATTORNEY 

L  KM  I  TED    FORM 

WITH     POWER     TO    OVERDRAW 


Know  all  Men   hy  these  Presents  that 


Fill  in  here 
the  name,  busi- 
ness and  ad- 
dress  of  the 


of. 


omej.  ^^^^  been  made,  constituted  and  appointed,  and  is  by 
these  presents  made,  constituted  and  appointed  the 
true  and  lawful  Attorney  of  the  undersigned 


Fill   in   here 
the  name,  busi- 
ness   and    ad-     • •  • 
dress  of  the    of. 
Customer. 


for  and  in  the  name  of  the  undersigned  to  Indorse  all 
or  any  Bills  of  Exchange,  Orders,  .Drafts  and  Checks 

for  deposit  witli  the Bank,  to  draw  and 

The  words  in  sign  all  Checks,  Orders  and  Drafts  for  payment  of 
italics  may  be  money  on  the  said  Bank,  and  to  overdraw  the  ar- 
ruled  out  if  the  ,      j^    ^i  i       ■        j       -n    ^  -r    i        i    i, 

Attorney  is  not    ^ount  of   the   vnderstgned  with  the  same  if  he  shall 

to  have  power  fhink  fit;  to  arrange,  settle  and  balance  all  books 
and  accounts,  and  to  sign  the  Bank's  form  of  settle- 
ment of  balances  and  release;  and  generally  for  and 
in  the  name  of  the  undersigned,  to  transact  with  the 
said  Bank  any  business  that  may  be  necessary  in 
the  premises;  and  all  that  the  said  Attorney  shall 
do  by  virtue  hereof  is  hereby  ratified  and  confirmed. 
The  said  Bank  may  continue  to  deal  with  the  said 
Attorney  imder  tliis  power  until  notice  of  the  revo- 
cation hereof  has  been  given  in  writing  to  the  Man- 
ager or  Acting  Manager  of  the  Branch  of  the  said 
Bank  at  which  the  account  of  the  undersigned  is 
kept,  and  imtil  such  notice  in  writing  has  been  given, 
the  acts  of  the  said  Attorney  hereunder  with  tiic 
said  Bank  shall  be  binding  on  the  undersigned. 

Ix   WITNESS   WHEREOF  tliese   prcscuts   have  been   exe- 
cuted by  the  undersigned   at the 

day     of One     Thousand     Nine     Hundred 


and    . . . . 
Witness 


Figure  49 
250 


POWER    or    ATTORXEY 
FULL    FORM 


Kxow  All  Mex  by  these  Presents  that 


Fill  in  here 
the  name,  busi- 
ness and  ad- 
dress  of  the 
Attorney. 


Fill  in  here 
the  name,  busi- 
ness and  ad- 
dress  of  the 
Customer. 


of. 


has  been  made,  constituted  and  appointed,  and  is  by 
these  presents  made,  constituted  and  appointed  the 
true  and  lawful  Attorney  of  the  undersigned 


of. 


for  and  in  the  name  of  the  undersigned  to  draic,  ac- 
cept, sign,  make,  indorse,  negotiate  and  dispose  of 
all  or  any  Bills  of  Exchange,  Promissory  Notes, 
Checks,  and  Orders  for  the  payment  of  money;  to 
pay  and  receive  all  moneys  and  to  give  acquittances 
for  the  same;  to  discount  or  deposit  with  or  transfer 

to  the Baxk   any   negotiable   paper. 

Stocks,  Bonds  and  other  .securities;  to  draw  and  sign 
all  Checks,  Orders  and  Drafts  for  payment  of  money 
on  the  said  Bank,  and  to  overdraw  the  account  of 
the  undersigned  with  the  same  if  he  shall  think  fit; 
to  arrange,  settle  and  balance  all  books  and  accounts, 
and  to  sign  the  Bank's  form  of  settlement  of  bal- 
ances and  release;  and  generally  for  and  in  the  name 
of  the  undersigned  to  transact  with  the  said  Bank 
any  business  he  may  think  fit;  and  all  that  the  said 
Attorne)^  shall  do  by  virtue  hereof  is  hereby  ratified 
and  confirmed. 

The  said  Bank  may  continue  to  deal  with  the  said 
Attorney  under  this  jiower  until  notice  of  the  revoca- 
tion hereof  has  been  given  in  writing  to  the  Manager 
or  Acting  Manager  of  the  Branch  of  the  said  Bank 
at  which  the  account  of  the  undersigned  is  kept, 
and  until  such  notice  in  writing  has  been  given,  the 
acts  of  the  said  Attorney  hereunder  with  the  said 
Bank  shall  be  binding  on  the  undersigned. 
In  witness  whereof  these  presents  have  been  exe- 
cuted by  the  undersigned  at   

the day    of 

One  Thousand  Nine  Hundred  and 

Witness 


Figure  43 
251 


252  BANKING  PRACTICE 

it  confers  power  to  overdraw,  for  which  the  principal 
undertakes  to  be  responsible. 

When  a  power  of  attorney  is  revoked  the  revoca- 
tion may  be  acknowledged,  but  under  no  circum- 
stances should  a  power  of  attorney  once  lodged  with 
a  bank  be  surrendered. 

A  power  of  attorney  is  terminable  by  the  following- 
causes  : 

(a)  Revocation  by  the  principal 

(b)  Renunciation  by  the  attorney 

(c)  Dissolution  of  a  partnership 

(d)  Loss  of  civil  rights  or  civil  capacity  (as  inter- 
diction ) 

(e)  Death  of  the  principal 

(f )  Bankruptcy  of  the  principal. 

Care  should  be  taken  to  procure  properly  certified 
copies  of  the  by-laws  or  resolutions  authorizing  offi- 
cials to  sign  for  incorporated  companies,  municipali- 
ties and  other  similar  bodies.  These  should  be  en- 
tered in  the  register  in  the  same  manner  as  the  powers 
of  attorney. 

The  properly  authorized  signing  officers  of  a  muni- 
cipal corporation  whose  checks  are  a  correct  charge 
against  a  credit  balance  may  not  create  a  debt,  which 
an  overdraft  would  be,  unless  authorized  by  by-law 
to  do  so.  However  temporary  an  advance  to  a  cor- 
poration may  be,  a  by-law  or  resolution  authorizing 
it  must  be  passed  and  a  certified  copy  of  it  should 
invariably  be  lodged  with  the  bank.  Such  resolution 
should  state  the  source  from  which  payment  is  to  be 


LOANING  MONEY  253 

made,  such  as  taxes,  for  example,  and  should  also 
provide  for  renewals,  if  necessary. 

REVIEW 

What  should  be  the  basis  of  credit  extension  by  a  bank  ? 

Why  is  a  statement  of  affairs  of  the  borrowing  concern  neces- 
sary in  extending  credit? 

What  principles  and  rules  should  govern  the  credit  man  ? 

What  are  quick  assets?  Fixed  assets?  Current  liabilities? 
To  what  extent  may  current  liabilities  indicate  a  man's  worth  as 
a  credit  risk  ? 

What  is  the  value  of  a  guarantee  bond  ? 

Why  should  a  bank  retain  the  original  of  any  power  of  attor- 
ney? 


CHAPTER  VII 

CLASSIFICATION  OF  LOANS 

1.  Call  loans. — The  subject  of  call  loans  in  Canada, 
or  elsewhere,  as  an  asset  of  the  bank  has  already  been 
dealt  with  in  Chapter  VI,  Part  I,  and  it  is  only  neces- 
sary to  describe  briefly  the  methods  of  making  such 
advances  in  Canada.  These  loans  are  generally  made 
to  brokers  on  satisfactory  stocks  and  bonds  listed 
in  the  local  market,  and  with  a  margin  of  about  20 
per  cent  and  10  per  cent,  respectively. 

Two  margin  tests  should  be  applied:  first,  a  20 
per  cent  margin  of  security  above  the  amount  of  the 
loan ;  second,  ten  points  per  share  less  than  the  market 
value  of  the  stock.  The  first  test  insures  an  ample 
margin  on  high-priced  stock,  and  the  second  discrimi- 
nates against  low  non-dividend  paying  stock.  For 
instance,  20  per  cent  on  stock  selling  at  $30  per  share 
would  mean  a  margin  of  $6  per  share  as  against  $10, 
or  33^/3  per  cent,  called  for  by  the  second  rule. 

Figure  44  is  the  form  in  general  use,  and  combines 
in  one  the  hypothecation  and  the  agreement  of  sale  in 
case  of  default  in  keeping  up  the  necessary  margin. 
The  discount  clerk  should  see  that  every  cei-tificate  of 
stock  pledged  is  good  delivery;  that  is,  the  certificate 
must  be  in  the  name  of  a  responsible  broker  or  the 

254 


191.... 

The    undersigned    hereby    acknowledge    to    have    received 

from  THE   BANK 

Dollars,  as  an  advance,  which  sum  will 

bear  interest  from  this  date at  the  rate 

of per   cent   per   annum,   as   well   after   as   before 

maturity,  and  is  repayable 

And  the  undersigned  liaving  cause  to  be  transferred  to 
the  Bank,  or  to  one  or  more  of  the  officers  thereof  in  trust, 
the  following  security,  namely : 


e&e&ee^^ 


(D@@( 


to  be  held  as  collateral  security  for  the  payment  of  the  said 
advance  and  interest,  the  Bank  is  hereby  authorized  to  sell 
and  convey  the  said  security,  or  part  thereof  from  time  to 
time,  whenever  the  Bank  shall  think  proper,  upon  default 
in  the  payment  of  the  said  advance,  and  to  apply  the  pro- 
ceeds thereof  towards  its  reimbursement,  without  preju- 
dice to  its  claims  upon  the  undersigned  for  any  deficiency. 

Should  the  said  security  depreciate  in  value  before  the 
maturity  of  said  advance,  the  Bank  is  hereby  authorized 
to  sell  and  convey  the  same,  or  part  therof,  from  time  to 
time,  without  waiting  the  day  of  payment. 

It  is  also  hereby  agreed  that  should  the  Bank  at  any 
time  determine  upon  a  sale  and  conveyance  of  the  said 
securitj%  or  part  thereof,  from  time  to  time,  for  either  of 
the  reasons  above  stated,  such  sale  and  conveyance  may  I)e 
made  without  notice  to  the  undersigned,  all  and  every  for- 
mality prescribed  by  law  or  otherwise  in  relation  to  such 
sale  and  conveyance  iieing  hereby  waived. 

And  it  is  further  agreed  that  should  the  Bank  allow  the 
undersigned  to  substitute  for  the  above  other  collateral 
security  such  substituted  security  shall  be  held  by  the  Bank, 
subject  to  the  same  terms  and  conditions,  and  with  power 
and  authority  to  dispose  of  and  apply  the  same  in  the  same 
manner  as  the  Bank  could  have  done  with  the  original  se- 
curity. 

And  it  is  understood  and  agreed  that  the  Bank  is  at 
liberty  to  retain  and  use  the  above  mentioned  security  (or 
substituted  security)  as  collateral  for  any  other  indebted- 
ness or  liability,  present  or  future,  of  the  undersigned  to 
the  Bank. 

In  case  any  security  or  substituted  security  transferred 
to,  or  lodged  with,  the  Bank  is  in  the  form  of  a  certificate 
for  shares  of  stock,  with  a  blank  transfer  and  power  of  at- 
torney in  blank  to  transfer  the  shares  of  stock  on  the 
books  of  the  Company  endorsed  thereon  or  attached  thereto, 
the  Bank  is  hereby  authorized,  through  any  of  its  officers 
or  employees,  to  fill  in  all  I)lanks  in  such  transfers  and 
powers  of  attorney  with  such  names  and  in  such  manner 
as  may  be  thought  best  by  the  Bank,  and  to  seal  and  deliver 
the  same  after  such  blanks  have  been  filled  in. 

Witness  the  hand  and  seal  of  the  undersigned. 


Figure  44.     Form  for  Hypotiiecatixg  Coi.i.A'n;RAL 
255 


256  BANKING  PRACTICE 

indorsement  guaranteed  by  a  broker  whose  signa- 
ture the  bank  knows,  and  should  be  assigned  in  blank 
and  witnessed.  These  requirements  not  only  insure 
the  genuineness  of  the  stock,  but  also  that  claims  for 
dividends  are  made  on  responsible  brokers  by  the 
holders  of  the  stock.  To  make  a  transfer  every  time 
a  certificate  changes  hands  would,  of  course,  be  im- 
possible. Bonds  should  be  scrutinized  to  see  that 
they  are  payable  to  bearer,  and  all  bonds,  debentures, 
certificates  of  stock  and  similar  certificates  pledged 
as  collateral  for  advances,  or  lodged  for  safe  keeping, 
should  be  kept  in  the  treasury  under  the  joint  custody 
of  the  manager  and  accountant.  All  securities,  as 
soon  as  received,  should  be  recorded  in  the  securities 
register  by  the  number  of  the  certificate  or  bond,  the 
name  of  the  company,  the  number  of  shares,  the  par 
value  of  the  shares  and  the  name  of  the  broker  to 
whom  the  certificate  is  assigned.  It  should  be  the  in- 
variable practice  of  every  bank  to  record  the  above 
particulars  of  any  stock  passing  thru  its  hands, 
whether  received  as  security  or  simply  passing  thiii 
the  bank's  books  attached  to  a  draft.  In  case  of  the 
loss  of  the  script  such  information  has  often  proved 
invaluable. 

2.  Loans  to  joint  stock  companies. — A  joint  stock 
company  has  been  defined  as  an  association  of  indi- 
viduals possessing  corporate  powers,  enabling  them 
to  transact  business  as  a  single  individual.  Such 
companies  may  obtain  incorporation  in  Canada  in 
several  ways: 


CLASSIFICATION  OF  LOANS  25r 

1.  By  special  act  of  either  the  Parliament  of  Can- 
ada or  the  provincial  legislatures ; 

2.  By  letters  patent  issued  under  the  General  Com- 
panies Acts  of  the  Dominion  of  Canada  or  of  the 
provinces  of  New  Brunswick,  Prince  Edward  Island, 
Quebec,  Ontario  or  Manitoba; 

3.  By  memorandum  of  association  in  the  provinces 
of  Nova  Scotia,  Saskatchewan,  Alberta  and  British 
Columbia. 

As  the  powers  conferred  on  companies  under  these 
several  methods  of  incorporation  vary,  banks,  as  a 
rule,  issue  instructions  to  their  branches  in  the  dif- 
ferent provinces  regarding  loans  to  joint  stock  com- 
panies; special  forms  for  by-laws,  etc.,  are  also  sup- 
plied. 

When  considering  loans  to  companies  incorporated 
by  special  acts,  it  is,  of  course,  necessary  to  refer  to 
the  companies'  charters  in  each  instance. 

In  opening  an  account  with  a  joint  stock  company, 
it  is,  therefore,  necessary  to  ascertain  the  following : 

1.  Has  the  company  power  to  borrow? 

2.  Have  the  directors  authority  to  exercise  that 
power  without  a  by-law  of  the  shareholders? 

3.  Is  there  a  specified  limit  to  the  amount  which 
can  be  borrowed,  and  has  that  limit  been  reached? 

4.  Have  the  directors  power  to  secure  the  payment 
of  moneys  borrowed  by  giving  security  under  Sec- 
tions 86-90  of  the  Bank  Act  or  by  mortgage  or  other 
charge  on  all  or  any  part  of  the  assets  of  the  com- 
pany? 


XVI— 18 


258  BANKING  PRACTICE 

This  information  can  be  obtained  from  the  charter 
and  records  of  the  company  and  from  the  statute 
under  which  the   company   is   incorporated.     These 

Resolution  i^assed  by  Ike  Board  of  Directors  of  the 

at  a   meeting   duli/ 

called,  held  at  the  o^ice  of  the  Company  in ". 

on  the day  of ,  292 


On  motion  it  was  resolved   that be  and 

hereby  is  authorized  on  behalf  of  the  Company  to  draw,  accept, 

sign,  make  and  agree  to  pay  all  or  any  Bills  of  Exchange,  Promissory 
Notes,  Checks  and  Orders  for  the  payment  of  money;  also  to  authorize 

any  Manager  or  other  officer  of  the bank  to 

accept  all  or  any  Drafts  or  Bills  of  Exchange  on  behalf  of  the  Com- 
pany; also  to  sign  checks  upon  and  to  borrow  money  from  the 

BANK  on  behalf  of  the  Company,  either  by  overdraw- 
ing the  account  of  the  Company  with  the  said  Bank  or  otherwise. 

Also   that be   and 

hereby  is  authorized  on  behalf  of  the  Company  to  assign  and  transfer  to 
the  Bank  all  or  any  Stocks,  Bonds,  Warehouse  Receipts,  Bills  of  Lad- 
ing, and  other  securities,  and  to  give  the  Bank  security  under  Section 
88  of  the  Bank  Act,  and  to  sign  a  written  promise  or  promises  binding 
the  Company  to  give  any  such  securities  as  aforesaid. 

Also    that or   any   one   of 

them,  be  and hereby  is,  authorized  on  behalf  of  the  Company  to 

negotiate  with,  deposit  with,  or  transfer  to  the  said  Bank  (but  for 
credit  of  the  Company's  account  only)  all  or  any  Bills  of  Exchange, 
Promissory  Notes,  Checks  or  Orders  for  the  payment  of  money  and 
other  negotiable  paper,  and  for  the  said  purpose  to  indorse  the  same 
or  aity  of  them  on  behalf  of  the  Company;  also  to  arrange,  settle,  bal- 
ance and  certify  all  books  and  accounts  between  the  Company  and  the 
Bank,  and  to  receive  all  paid  checks  and  vouchers,  and  to  sign  the 
Bank's  form  of  settlement  of  balances  and  release. 


CERTIFIED  n  trite  ropy  of  the  Resolution  passed  as  above  set 
forth  and  recorded  in  the  Minnte  Book  of  the  proceedlnys  of  the  Board 
of  Directors  of  said  Company. 

Dated   the day    of ,191 


PRESmENT 
SECRETARY 


The  President  and  Secretary  will  sign  as  above;  the  other  officers  as 
follows: 

Vice-President 

FiGiTiiE  4.5 


CLASSIFICATION  OF  LOANS  259 

questions  being  satisfactorily  answered,  it  is  custom- 
ary for  the  directors  of  the  company  to  pass  a  reso- 
lution outlining  the  powers  of  the  signing  officers, 
and  specifying  who  they  are  to  be.  A  certified  copy 
of  this  is  generally  supplied  to  the  bank  on  a  form 
similar  to  that  in  Figure  45. 

Where  a  by-law  of  the  shareholders  is  necessary  to 
confer  borrowing  powers  on  the  directors,  a  certified 
copy  of  the  by-law  is  supplied  to  the  bank  on  a  form 
similar  to  that  in  Figure  46,  supplemented  by  the 
directors'  resolution  above  referred  to. 

It  may  be  seen  from  the  above  that  care  should  be 
exercised  bj'^  a  bank,  not  only  in  opening  an  account 
with  a  company,  but  also  in  any  subsequent  transac- 
tions. It  is  well  to  remember  that  a  corj)oration  has 
no  personal  liability,  that  no  director  or  officer  of 
a  company  is  identified  with  the  business  of  the  com- 
pany as  closely  as  he  would  be  if  it  were  his  own 
undertaking,  and  that  failure  of  a  company  can  affect 
a  director  or  shareholder  only  to  the  extent  of  the 
amount  of  his  shares.  In  view  of  this  limited  liability 
it  is  customarj^  among  banks,  when  a  company  is  a 
frequent  applicant  for  loans,  to  require  the  personal 
guarantee  of  the  directors.  The  logic  of  this  is  sound, 
and  the  refusal  on  the  part  of  the  directors  to  comply 
with  this  condition  should  be  considered  with  extreme 
caution.  If  the  men  who  are  managing  the  com- 
pany have  not  sufficient  confidence  in  their  own  man- 
agement to  guarantee  the  loan,  why  should  the  bank 
take  the  risk? 


260  BANKING  PRACTICE 

BY-LAW   of   the 


Be  it  Enacted  as  a  By-law  of  the  Company  as  follows: 

The  Directors  may  borrow  money  on  the  credit  of  the  Company 
from  time  to  time  and  in  such  amounts  as  they  may  think  proper, 
and  may  hypothecate,  mortgage  or  pledge  the  personal  property  of 
the  Company  to  secure  any  sum  or  sums  borrowed  for  the  purposes 
thereof. 

The  borrowings  of  money  from  time   to  time  heretofore  under  the 

authority  of  the  Directors   from  the bank 

and  the   giving   of   securities    therefor   under    Section   88  of   the   Bank 
Act  or  otherwise  are  hereby  ratified  and  confirmed. 

Ik  witness  whereof  the  corporate  seal  of  the  Company  has 
been  hereto  affixed,  and  this  Bv-law  duly  countersigned  the 
dav  of *. 191. .. . 


L.  S. 


president 


At  a  general  meeting  of  the  shareholders  of  the  above-named  Com- 
pany   duly    called    for    considering    the    foregoing    By-law,    which    was 

passed  by  the  Directors  on  the day  of 

191 ,  and  lield  on  the day  of 191 , 

the  same  was  duly  sanctioned  and  confirmed  by  a  vote  of  not  less  than 

two-thirds  in  value  of  the 

(1)   subscribed  stock  represented 

at    such    meeting. 

(5)  shareholders  present  in  person  or  by  proxy 


CHAIRMAN    OF    THE    MEETING 
SECRETARY 


Figure  46 

3.  Loans  to  miinicipaUtics. — The  conditions  gov- 
erning loans  to  municipalities,  school  districts  and 
other  public  bodies  differ  in  the  various  provinces 
and  also  in  the  case  of  cities  incorporated  under  spe- 
cial charter.  As  the  laws  are  frequently  changing 
no  general  procedure  can  be  formulated.  The  head 
office  of  each  bank  generally  issues  specific  instruc- 


CLASSIFICATION  OF  LOANS  261 

tions  and  forms  regarding  these  loans  to  their 
branches  in  the  several  provinces. 

Generally  speaking,  municipalities,  on  resolution  of 
their  councillors,  are  authorized  to  anticipate  taxes  by 
borrowing  up  to  a  certain  percentage  of  their  annual 
assessment.  These  borrowings  must  usually  be  re- 
tired by  the  taxes  as  they  are  paid  in.  The  loans  are, 
and  should  be,  short  in  term.  When,  however,  one 
year's  borrowings  overlap  another  the  advances  should 
be  kept  distinct.  Such  loans,  when  supported  by 
authentic  copies  of  the  resolution  of  the  council,  may 
be  considered  legitimate  banking  undertakings. 

Frequently  a  municipality  is  authorized  by  a  by- 
law, voted  on  by  its  ratepayers,  to  borrow  money  for 
some  specific  purpose,  such  as  water  works,  drains 
and  the  like.  It  is  advances  of  this  description  which 
form  one  of  the  objectionable  features  of  municipal 
accounts.  As  a  rule,  municipalities  postpone  any 
definite  arrangement  as  to  the  disposition  of  the  bonds 
until  the  construction,  for  which  the  issue  is  autho- 
rized, has  been  completed.  In  the  meantime,  they 
look  to  their  banks  for  advances  from  time  to  time 
until  the  work  is  fully  accomplished.  This  feature 
in  itself  is  not  objectionable  if  the  municipality  takes 
immediate  steps  to  dispose  of  its  bonds  on  the  com- 
pletion of  the  work.  Unfortunately,  this  is  seldom 
the  case.  Financial  committees  sometimes  number 
among  their  members  one  or  more  amateur  financiers, 
who  not  only  have  exalted  ideas  of  the  market  value 
of  the  bonds  in  question,  but  also  overestimate  their 


262  BANKING  PRACTICE 

own.  ability  in  judging  market  conditions.  The  re- 
sult is  that  the  time  in  their  opinion  is  rarely  oppor- 
tune for  making  a  sale  of  the  bonds,  and  the  bank 
is  confronted  with  the  necessity  of  continuing  to  carry 
an  unsatisfactory  loan  or  enforcing  a  sale  of  the  bonds, 
both  undesirable  alternatives.  The  proper  method 
to  follow  in  making  such  advances  is  to  see  that,  at 
the  inception  of  the  loan,  a  definite  arrangement  is 
made  as  to  the  disposition  of  the  bonds,  irrespective 
of  market  or  other  conditions. 

4.  Loans  to  professional  men. — Loans  to  profes- 
sional or  salaried  men  cannot  be  considered  desirable 
from  a  banking  point  of  view,  or  from  any  point  of 
view  for  that  matter.  Even  where  the  applicant  is 
possessed  of  private  means,  a  loan  of  this  nature  is 
more  or  less  objectionable  according  to  its  object  and 
the  understanding  as  to  final  payment.  The  money 
may  be  locked  \i\)  in  some  undesirable  venture,  and 
tho  sure  of  ultimate  payment  the  bank  is  confronted 
with  the  alternative  of  carrying  a  dead  loan  or,  by 
enforcing  payment,  making  an  enemy  of  a  desirable 
citizen. 

Loans  to  men  who  depend  entirely  on  their  salaries 
and  professional  earnings  should  not  be  considered 
except  in  very  exceptional  cases.  If  a  man  cannot 
live  on  his  salary  he  cannot  hope  to  pay  off  an  indebt- 
edness in  addition.  The  loan  is  either  intended  to 
discharge  another  indebtedness  or  to  purchase  some- 
thing which  cannot  be  paid  for  out  of  future  salary. 
Credit  is  a  good  servant  and  a  bad  master,  and  many 


CLASSIFICATION  OF  LOANS  263 

men  in  these  days  of  competition,  both  social  and 
otherwise,  are  induced  to  "keep  up"  with  their  neigh- 
bors, to  purchase  automobiles,  and  generally  to  live 
in  a  style  beyond  their  means. 

Retail  merchants  frequently  offer  this  class  of  paper 
for  discount,  and  the  objection  to  this  is  even  more 
pronounced.  If  a  man  cannot  pay  for  the  necessities 
of  life  for  his  family  there  is  not  much  likelihood  of 
his  being  able  to  pay  off  a  debt. 

These  remarks  are  not  intended  to  apply  to  worthy 
people  who  have  suffered  misfortune,  and  to  whom 
every  consideration  should  be  shown,  but  it  does  refer 
to  people  entirely  dejiendent  upon  moderate  salaries, 
received  with  a  regularity  which  renders  credit  un- 
necessary. 

5.  Loans  to  farmers. — Under  certain  conditions  of 
farming,  more  especiallj^^  in  the  West,  credit  for  a 
farmer  is  more  or  less  a  necessity,  and  loans  to  respon- 
sible farmers  is  a  desirable  and  legitimate  business 
for  a  bank.  In  the  East,  where  mixed  farming  pre- 
vails, the  farmer  is  not  only  in  easy  circumstances, 
with  perhaps  a  savings  bank  account  or  money  loaned 
out  on  mortgage,  but  he  has  a  more  or  less  certain 
income  thruout  the  year  from  tlie  sale  of  farm  produce 
to  the  neighboring  towns.  Loans  when  made  to  him 
are  generally  for  some  specific  purpose — such  as  the 
purchase  of  cattle  for  fattening — in  other  words  for 
the  creation  of  an  immediately  liquid  asset. 

In  the  West,  however,  where  only  grain-growing 
prevails,  a  farmer  has  practically  only  one  crop  a 


264  BANKING  PRACTICE 

year,  and  it  is  necessary  for  hini  to  have  credit  while 
he  is  preparing  for  the  crop,  as  he  has  to  wait  until  the 
fall  before  receiving  any  return  for  his  year's  work. 
Seed  must  be  bought,  labor  paid  for  and,  while  the 
crop  is  growing,  the  farmer  must  live.  Few  farmers 
can  cultivate  their  farms  without  some  credit  either 
from  a  bank  or  store,  and  if  no  credit  were  extended 
they  could  neither  purchase  nor  produce  anything. 

Credit  to  a  farmer,  no  matter  what  his  moral  or 
financial  standing,  is  relative  and  should  not  exceed 
a  year's  supplies  at  any  time.  The  loan  should  be 
cleaned  up  regularly  after  harvest,  unless  arrange- 
ments were  made  by  way  of  advances  under  Section 
88  of  the  Bank  Act.  The  size  of  the  farm  and  the 
amount  of  land  under  crop  should  also  be  carefully 
considered,  for  some  farmers  are  too  ambitious  and  trj'' 
to  farm  too  much  land.  The  tenure  of  the  land,  the 
amount  of  mortgage,  and  other  indebtedness,  espe- 
cially for  machinery,  are  all  important  features  in 
considering  advances  to  this  class.  As  a  rule,  tlie 
farmer  should  not  need  to  borrow  from  the  bank 
until  seed-time  to  pay  for  seed,  labor  and  the  like. 
If  his  crop  is  successful,  he  should  be  clear  of  his 
indebtedness  before  the  end  of  the  year,  and  have  a 
good  surplus  to  pay  on  his  mortgage  or  to  place  in  the 
bank. 

A  clause  in  Section  88  of  the  Bank  Act  of  1913 
permits  a  bank  to  lend  money  to  a  farmer  "on  the 
security  of  his  threshed  gi-ain  gi'own  upon  the  farm." 
The  addition  of  tliis  clause  was  due  to  the  fact  that 


CLASSIFICATION  OF  LOANS  26d 

the  grain  grown  by  a  farmer  in  the  West  was  ex- 
pected to  clean  up  his  indebtedness  at  harvest  time 
or  shortly  afterward.  This  condition  worked  a  hard-* 
ship  on  the  farmer,  who  sometimes  had  to  throw  his 
crop  on  the  market  regardless  of  prices,  instead  of 
having  an  opportunity  to  await  normal  conditions. 
The  volume  of  sales,  moreover,  at  this  time  depresses 
prices  and  adds  to  the  confusion  and  congestion  on 
the  railways.  The  farmer  is  now  in  a  position  to 
offer  the  security  of  a  staple  article,  and  can  borrow 
enough  on  his  crop  to  pay  off  his  indebtedness.  It 
is  still  early  to  give  any  opinion  on  the  result  of  the 
new  law  but,  speaking  generall}-^,  it  possibly  will  not 
make  very  much  difference  to  the  responsible  farmer, 
as  he  was  able  to  borrow  money  on  his  o\Aai  note  in 
any  case.  As  to  the  farmer  of  less  favorable  stand- 
ing, it  is  questionable  whether  a  security  entirely  under 
his  control  will  improve  his  chance  of  credit. 

6.  Loans  to  retail  merchants. — As  a  general  rule, 
retail  merchants  are  not  entitled  to  unsecured  ad- 
vances on  their  own  name.  A  storekeeper  who  takes 
considerable  credit  from  the  wholesale  trade  should 
be  able  to  obtain  all  his  credit  from  that  source.  If 
his  position  is  not  such  as  to  enable  him  to  do  this, 
a  bank  should  not  intervene  unless  he  is  able  to  put 
up  good  trade  bills  or  other  security.  A  bank  has 
only  the  bare  interest  in  the  loan,  while  the  wholesale 
merchant  has  a  margin  of  20  or  30  per  cent  profit 
to  fall  back  on  in  case  of  loss.  If  the  loan  is  sought 
for  the  purpose  of  paying  cash  for  goods  purchased, 


266  BANKING  PRACTICE 

it  should  be  borne  in  mind  that  the  usual  discount 
granted  by  the  seller  for  cash  is  12  per  cent  per  annum 
or  more,  that  being,  in  effect,  his  estimate  of  the  degree 
of  risk,  while  for  precisely  the  same  risk  the  bank  is 
asked  to  be  satisfied  with  s'even  per  cent  or  even  less. 
The  mere  transfer  of  an  obligation  from  the  mercan- 
tile creditor  to  a  bank  does  not  diminish  by  one-half 
the  monetary  risk  of  the  accommodation;  it  is  illogi- 
cal and  irrational  to  assume  such  risks  for  an  ordinary 
banking  rate  of  discount. 

Loans  to  retailers  are  dangerous  both  to  the  bank 
and  to  the  borrower;  to  the  bank  on  account  of  the 
risk,  and  to  the  borrower  because  it  frequently  leads 
to  lax  methods  of  collecting. 

7.  Loans  to  manufacturers  and  merchants — Xatu- 
rally  the  bulk  of  the  loans  of  a  commercial  bank  con- 
sists of  advances  to  manufacturers  and  wholesale  mer- 
chants. Both  classes  are  considered  highly  desirable 
customers.  They  are  at  times  hea\y  borrowers  from 
banks,  and  a  consideration  of  their  relative  merits  in 
that  connection  is  of  interest.  jNIr.  George  Hague, 
in  his  "Banking  and  Commerce/'  has  expressed  him- 
self so  clearly  on  the  subject  that  he  is  well  worth 
quoting : 

There  is  this  fundamental  difference  between  the  whole- 
sale merchant  and  the  manufacturer ;  the  merchant,  if 
his  credit  is  good  enough,  can  put  the  whole  of  his  stock 
upon  his  shelves  without  the  expenditure  of  a  single  dollar 
except  for  freight  and  duties.  Good  credit  will  enable  him 
to  obtain  all  he  wants  from  manufacturers  on  this  side  of 
the  Atlantic,  or  from  wholesale  houses  in  England.     But  a 


CLASSIFICATION  OF  LOANS  267 

manufacturer  can  do  nothing  of  the  kind.  From  the  time 
that  he  begins  operations  he  has  to  provide  for  a  cash  ex- 
penditure which  never  ceases  until  goods  are  ready  for  sale. 
In  nearly  every  branch  of  manufacture  he  must  pay  cash 
for  his  raw  material  and  his  fuel.  And  the  moment  he  be- 
gins the  manufacturing  process,  his  pay-roll  of  wages  con- 
fronts him  week  hy  week,  and  must  be  met.  There  can 
be  no  possibility  of  asking  credit  here ;  not  for  a  single 
week  could  wages  be  left  unpaid.  In  the  case  of  special 
lines  of  manufacture  where  wages  are  a  most  important  item 
of  cost,  the  necessity  of  meeting  the  large  sums  required  is 
the  most  harassing  of  all  financial  pressures.  It  presses, 
indeed,  more  heavily  than  the  necessity  of  meeting  accept- 
ances and  promissory  notes,  for  the  payees  of  these  can 
be  approached  for  renewal,  at  a  pinch,  while  a  request  to  a 
body  of  workmen  to  defer  payment  of  wages  is  utterly  im- 
possible. And  as  payment  is  imperative,  the  manufacturer 
will  naturally,  in  such  circumstances,  have  recourse  to  his 
banker. 

Hence,  it  is  more  difficult  to  finance  for  a  manufacturing 
establishment  than  for  the  business  of  a  wholesale  merchant. 
The  latter,  having  the  power  to  bu^^  goods  at  all  times  on 
credit,  has  no  reasonable  ground  for  asking  regular  ad- 
vances from  his  banker.  His  dealings  should  be  confined, 
as  a  rule,  to  the  discount  of  bills  given  by  his  customers. 

The  only  payments  a  wholesale  merchant  has  to  make, 
which  are  absolutelv  imperative,  are  the  customs  duties  and 
freight  on  imported  goods.  It  is  just  as  impossible  to  ask 
credit  here  as  it  would  be  for  the  payment  of  wages.  But 
no  wholesale  merchant  could  reasonably  think  of  commenc- 
ing business  without  capital,  and  the  very  lowest  minimum 
necessary  would  be  an  amount  sufficient  to  pay  the  duties 
on  the  stock  requisite  to  commence  business,  and  thereafter 
on  his  average  stock. 

Once  he  has  his  goods  in  warehouse,  he  can  begin  to  sell, 
and  with  such  facilities  as  bankers  are  now  read}'  to  offer 
for  the  cashing  of  customers'  bills,  a  merchant  may,  from  a 
•financial  point  of  view,  be  said  to  be  able  to  sell  for  cash. 


268  BANKING  PRACTICE 

Thus,  by  the  time  the  payments  for  his  stock  become  due, 
the  proceeds  of  his  sales  ought  to  be  sufficient  to  meet  them. 

From  all  which  the  rule  may  be  deduced  that  loans  to  a 
wholesale  merchant  (as  distinguished  from  the  discount  of 
trade  bills)  should  be  considered  as  irregular  in  the  nature 
of  things,  and  only  to  be  granted  in  exceptional  circum- 
stances. 

But  the  whole  system  of  loans  to  wholesale  merchants  is 
exceptional,  and  requires  exceptional  treatment  at  the  hands 
of  a  banker. 

The  character  of  that  treatment  may  be  indicated  as 
follows : 

First,  no  regular  line  of  credit  should  be  arranged  for  in 
respect  of  loans ;  that  is,  no  amount  which  a  customer  can 
always  have  at  his  command.  Second,  advances  should  be 
temporary,  each  being  applied  for  on  its  own  merits,  witli 
the  explanation  of  circumstances.  Third,  they  should  only 
be  allowed  at  certain  seasons,  and  never  last  more  than  two 
or  three  months  at  the  most.  Fourth,  renewals  should  not 
be  granted.  Indications  of  continuance  should  be  care- 
fully watched  and  promptly  dealt  with.  If  advances  be- 
come chronic,  security  should  be  insisted  upon.  Fifth,  it  is 
always  desirable,  too,  that  when  such  advances  are  granted 
to  a  firm,  the  indorsement  or  guaranty  of  each  individual 
in  it  should  be  obtained ;  for  individual  partners  may  have 
separate  estates  Avhich  the  indorsement  would  bind.  If  the 
business  is  carried  on  by  a  joint-stock  company,  the  guar- 
anty of  some  of  the  principal  stockholders  would  be  desir- 
able. 

8.  Collateral  notes. — There  are  several  reasons  why 
it  is  preferable  sometimes  to  make  advances  against 
notes  as  collateral  instead  of  discounting  them.  The 
borrower  may  need,  perhaps,  only  part  of  the  face 
value  of  the  notes,  and  that  only  for  a  short  time. 
The  quality  of  the  paper  may  not  warrant  an  advance 


CLASSIFICATION  OF  LOANS  269 

of  more  than  a  certain  percentage,  or  the  notes  may 
be  of  a  longer  currency  than  three  or  four  months, 
beyond  which  time  a  bank  is  loath  to  make  an  ad- 
vance. Its  assets  must  be  kept  liquid  and  not  locked 
up  in  long  time  loans. 

The  merits  of  a  note  tendered  as  collateral  should 
be  gauged  with  no  less  care  than  if  offered  for  dis- 
count; a  large  nominal  margin  may  be  delusive  and 
by  no  means  an  adequate  security.  Such  notes  should 
be  scrutinized  as  critically  as  discounted  bills,  and  re- 
jected if  defective  in  any  vital  part.  If  notes  offered 
by  agricultural  implement  dealers  and  others  are  en- 
cumbered with  conditions  which  render  them  non- 
transferable, they  should  be  refused.  Lien  notes,  or 
notes  secured  by  lien  on  implements,  machinery  and 
other  movable  equipment,  sold,  should  only  be  taken 
for  collection,  as  it  must  be  borne  in  mind  that  the 
maker  has  the  right  of  set-off  for  any  legitimate  claim 
against  the  vendor,  and  third  parties  must  always  be 
prepared  for  something  of  this  kind. 

The  bank  in  making  advances  of  any  nature  has  the 
right  to  expect  the  note  taken  to  be  free  from  any 
irregularity,  and  in  accord  with  the  requirements  of 
the  Bills  of  Exchange  Act.  It  is  not  sufficient  that 
a  bank  could  probably  overcome  any  irregularity  by 
proving  its  case;  even  successful  litigation  is  objec- 
tionable, and  invariably  means  considerable  worry  and 
some  loss  in  costs  and  time. 

All  notes  taken  as  collateral  security  should  be  hy- 
pothecated to  the  bank  on  a  form  duly  signed  by  the 


270  BANKING  PRACTICE 

borrower  (Figure  47  or  28).  The  form  Figure  47 
can  also  be  used  to  pledge  stocks  and  other  securities, 
permissible  under  the  Bank  Act.  The  attorney  for 
a  customer  cannot  hypothecate  collateral  notes  unless 
specially  empowered  to  do  so.  All  collateral  hypothe- 
cations should  be  consecutively  numbered  as  received 
from  the  customers,  and  filed  in  proper  order  in  the 
vault. 

The  full  margin  of  good  collateral  stipulated  as  the 
basis  for  any  credit  must  always  be  maintained.  A 
liberal  margin  will  generally  be  found  to  be  insuffi- 
cient in  case  of  trouble.  The  margin  agreed  upon  in 
all  cases  should  be  calculated  on  the  amount  of  collat- 
eral offered,  and  not  based  on  the  amount  of  the 
advance.  For  instance,  on  a  margin  of  25  per  cent, 
advance  $75  on  each  $100  worth  of  collateral  depos- 
ited. Do  not  base  the  margin  on  25  per  cent  of  the 
advance,  which  in  the  above  would  only  give  $93.75 
collateral  for  every  $75  advanced. 

Overdue  paper  should  not  be  accepted  as  collateral. 

In  the  case  of  wholesale  accounts  obtaining  ad- 
vances against  trade  paper  deposited  as  collateral,  it 
will  be  necessary  to  follow  the  account  as  closely  as 
if  the  paper  were  discounted.  For  this  purpose  tlie 
blue  book  used  in  the  discount  department  should  be 
used  (see  Figure  25),  and  an  account  opened  up  for 
each  obligant. 

In  all  cases  of  advances  against  this  class  of  security 
it  is  necessary  to  see  that  drafts  and  notes  which  are 
returned  unaccepted  or  unpaid  are  settled  for,  eventu- 


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ally,  by  the  maker  or  drawee.  The  wholesale  sur- 
rendering of  these  returned  items  to  the  pledger  in 
exchange  for  fresh  collateral  drafts  should  not  be  per- 
mitted. Under  no  circumstances  should  unaccepted 
drafts  which  are  lodged  as  collateral  be  held  without 
presentation  at  the  request  of  the  pledger,  or  for  any 
other  reason. 

9.  Accommodation  paper. — Accommodation  paper 
is  most  dangerous  when,  as  is  generally  the  case,  it  is 
carefully  concealed.  A  proof  of  a  banker's  sagacity 
will  be  best  seen  in  his  detection  of  the  accommoda- 
tion taint  wherever  it  may  exist,  however  dexterously 
covered  up,  and  in  keeping  clear  of  it  and  of  the  other 
dangerous  complications  and  contingencies  insepara- 
ble from  it. 

Accommodation  paper  disguised  as  trade  bills 
should  be  looked  for  and  regarded  with  the  same  dis- 
crimination applied  in  separating  spurious  coin  from 
genuine.  Such  paper  should  be  detected  if  a  man- 
ager is  observant  of  the  working  of  his  accounts. 

The  most  ordinary  kinds  of  accommodation  paper, 
according  to  an  old  rule  book,  are  the  following: 

(a)  Paper  floated  b}^  the  borrower  with  the  names 
of  his  friends  for  the  general  purposes  of  his  business, 
say,  a  drygoods,  grocery  or  hardware  business,  or  a 
manufacturing  business  of  any  kind. 

(b)  Paper  floated  by  the  parties  to  it  for  the  pur- 
pose of  going  into  some  speculation  outside  of  their 
legitimate  business.  They  are  induced  to  buy  or 
build  a  ship,  a  saw  mill  or  factory  of  some  kind,  a 


CLASSIFICATION  OF  LOANS  273 

farm,  a  mine,  timber  lands,  or  a  score  of  other  enter- 
prises. 

These  two  classes  of  accommodation  must  be 
avoided  at  all  hazards. 

(c)  Renewals  of  notes  that  were  legitimate  enough 
in  the  first  instance.  If  the  goods  they  originaily 
represented  are  still  unsold  by  the  promissor,  the 
paper  may  still,  in  a  sense,  be  held  to  be  legitimate, 
altho,  even  in  that  case,  the  renewal  is  a  most  un- 
healthy sign,  being  proof  of  over-production  and  over- 
trading. But  in  the  case  of  most  renewals  they  have 
lost  all  connection  with  the  goods  they  originally  rep- 
resented, the  proceeds  of  which  should  have  gone  to 
wipe  the  notes  out  of  existence  at  maturity.  The  pro- 
ceeds of  goods  have  been  used  for  something  else, 
and  the  notes  remain,  representing  nothing.  This  is 
accommodation  of  the  worst  kind. 

There  is  no  more  significant  indication  to  a  banker 
who  has  eyes  open  than  renewed  paper.  In  the  most 
favorable  light  you  can  take  it  shows  miscalculation. 
But  in  most  cases  it  means  something  much  worse — 
the  beginning  of  the  end. 

If  accommodation  paper  is  taken  at  all  you  should 
be  absolutely  certain  of  the  genuineness  of  the  signa- 
tures. The  danger  from  forgery  is  not  the  least  of 
the  dangers  attending  the  handling  of  this  objection- 
able kind  of  paper.  The  way  is  left  open  for  that 
kind  of  fraud  when  indorsed  notes  are  discounted  for 
the  promissors,  but  this  is  prohibited  in  most  banks. 

Never  overlook  the  consideration  that  if  you  take 

XVI— 19 


274  BANKING  PRACTICE 

an  accommodation  endorsement  you  see  perhaps  less 
than  one-half  of  the  paper  afloat  hearing  the  same 
names.  The  obligant  calls  for  a  quid  pro  quo,  the 
accommodation  becomes  reciprocal  and,  likely 
enough,  develops  into  a  network  of  cross  indorse- 
ments. 

10.  Overdrafts. — The  strong  objection  which  all 
banks  have  to  making  advances  by  way  of  overdrafts 
is  based  on  sound  principles,  which  are  not  generally 
understood  fully  or  appreciated.  The  principal  rea- 
sons why  this  form  of  advance  is  not  desirable  are  as 
follows : 

(a)  That  it  does  not  fix  the  customer's  liability  as 
indisputably  as  a  note  does ; 

(b)  That  it  leaves  the  date  of  repayment  uncer- 
tain and  thereby  tends  to  encourage  laxity  on  the  part 
of  the  borrower; 

(c)  That  the  maintenance  of  an  active  account  in 
the  current  account  ledger  involves  an  actual  out-of- 
pocket  cost  in  the  matter  of  stationery  and  clerical 
work,  and  it  is  important  that  the  average  free  balance 
in  such  accounts  should  be  sufficient  to  afford  the  bank 
a  proper  remuneration.  Accounts  in  which  the  bal- 
ance is  frequently  reduced  to  zero  or  converted  into 
an  overdraft  are  not  of  any  direct  value  to  a  bank.  It 
is  further  to  be  borne  in  mind  that  accounts  which 
from  time  to  time  are  overdrawn  are  a  further  ex- 
pense, thru  the  waste  of  the  time  of  the  managers  and 
ledger-keepers,  whenever  proper  authorization  has  to 
be  obtained  for  payment  of  a  check  creating  or  in- 


CLASSIFICATION  OF  LOANS  275 

creasing  an  overdraft,  as  all  such  checks  have  to  be 
referred  to  the  manager. 

(d)  No  customer  has  the  right  to  issue  an  order 
upon  a  bank  to  pay  money  which  he  has  not  at  his 
credit.  The  least  he  can  say  is  that  he  wishes  to 
borrow  so  much,  for  such  a  time,  so  that  the  manager 
may  decide  whether  the  money  will  be  lent  or  not; 
otherwise  an  attempt  is  made  to  borrow  the  bank's 
money  without  its  consent. 

The  j)ractice  of  issuing  a  check  without  having  any 
account  is  a  criminal  offense,  and  many  business  men 
are  in  favor  of  placing  a  check  for  which  there  are  not 
sufficient  funds  in  the  same  category.  In  some  towns 
the  banks  make  a  practice  of  adding  10  or  15  cents 
to  each  check  returned  dishonored  from  the  clearing 
house  before  charging  it  to  the  indorser's  account. 
This  charge  has  been  found  to  have  a  deterrent  effect 
on  the  practice,  and  has  therefore  met  with  the  ap- 
proval of  the  merchants. 

An  overdraft  in  a  savings  account  is,  of  course,  ab- 
surd and  under  no  circumstances  should  be  allowed. 

REVIEW 

What  margin  tests  sliould  be  applied  to  tlie  security  for  call 
loans  ? 

Why  is  it  sometimes  preferable  to  make  advances  against  notes 
as  collateral  rather  than  to  discount  them? 

What  is  the  maximum  term  of  credit  to  a  farmer?     Why? 

AVhat  are  the  ordinary  kinds  of  accommodation  paper? 

Why  is  an  advance  in  the  form  of  an  overdraft  undesirable? 


CHAPTER  VIII 

ADVANCES  ON  WAREHOUSE  RECEIPTS  AND 
ASSIGNMENTS 

1.  Sections  86  and  88. — Before  studying  the  spe- 
cial conditions  governing  a  bank's  advances  on  the 
security  of  merchandise,  etc.,  it  is  necessary  to  grasp 
thoroly  the  difference  between  security  afforded  by 
warehouse  receipts  under  Section  86  and  the  securit}^ 
on  a  loan  given  under  Section  88  of  the  Bank  Act. 
The  main  difference  is  one  of  the  possession  of  the 
goods,  namely,  constructive  and  actual  possession  of 
the  security,  respectively. 

Advances  on  a  warehouse  receipt  or  bill  of  lading 
can  be  made  to  any  person,  and  the  continued  exist- 
ence of  the  security  depends  upon  the  reliability  of  an 
independent  party,  the  warehouseman  or  carrier,  pro- 
duction and  surrender  of  the  warehouse  receipt  being 
necessary  to  obtain  the  goods.  Loans  of  this  kind  are 
reasonably  safe,  and  the  conditions  governing  them 
are  very  simple. 

In  the  case  of  advances  made  under  Section  88, 
however,  the  conditions  are  much  more  complicated, 
as  advances  under  this  section  can  only  be  made  to 
manufacturers  and  wholesalers  dealing  in  certain 
classes  of  goods,  the  continued  existence  of  the  se- 

276 


ADVANCES  ON  ASSIGNMENTS  277 

curity  depending  entirely  upon  the  probity  and  the 
abihty  of  the  pledger,  who  retains  possession  and  con- 
trol of  the  goods  himself.  Consequently,  a  bank 
never  lends  money  under  Section  88  unless  it  is  abso- 
lutely certain  of  the  honesty  and  experience  of  the 
customer.  Even  then,  loans  of  this  class  are  not  very 
desirable,  owing  to  the  technical  detail  and  work  in- 
volved in  their  operation.  There  is  always  a  latent 
risk.  jNIen  who  have  had  no  previous  experience  in 
this  kind  of  business,  no  matter  how  competent  in 
other  lines,  are  not  good  credit  risks  for  this  kind  of 
loan.  They  should  furnish  good  indorsements  or 
other  security  in  addition,  until  they  have  shown  by 
actual  experience  that  their  operations  are  successful. 

Sections  86-90,  which  give  the  bank  special  privi- 
leges to  take  such  security,  are  based  on  the  principle 
that  the  security  must  be  taken  and  bear  the  same 
date  as  the  advances,  for  which  it  is  taken,  thus  insur- 
ing that  the  assets  of  the  borrower  will  be  increased 
concurrently,  and  therefore  the  act  will  not  in  any 
way  operate  to  the  injustice  of  any  creditor.  Conse- 
quently, if  there  is  any  discrepancy  between  the  date 
of  the  advances  and  the  date  of  the  taking  of  the  se- 
curity, the  legality  of  the  latter  is  voided  unless,  prior 
to  the  advance,  the  bank  holds  a  written  promise  that 
the  security  would  be  given. 

It  must  always  be  borne  in  mind  that  banks  alone 
are  permitted  to  take  this  kind  of  security.  For  that 
reason,  it  is  necessary  when  making  advances  to  fol- 
low strictly  the  letter  as  well  as  the  spirit  of  the  law. 


278  BANKING  PRACTICE 

Otherwise  the  courts,  if  called  upon  to  adjudicate, 
would  no  doubt  render  judgment  against  a  bank. 
The  whole  of  this  system  is  more  or  less  a  novelty  in 
business  practice,  and  in  some  respects  may  act  con- 
trary to  established  business  customs.  The  fact,  how^- 
ever,  that  there  have  been  so  few  lawsuits  arising  out 
of  such  transactions  goes  to  show  that  the  system 
works  well  in  practice,  and  that  no  interests  have  suf- 
fered, notwithstanding  the  enormous  volume  of  busi- 
ness transacted.  The  conditions  governing  the 
classes  of  loans  under  Section  88  are  varied  and  more 
or  less  technical,  and  the  following  brief  description 
is  intended  only  as  a  general,  rather  than  a  specific, 
explanation  of  some  of  the  more  important  featm-es. 
2.  Section  88. — Under  this  section  banks  are  per- 
mitted to  make  advances: 

To  any  zcholcsale  purchaser  or  shipper  of  or  dealer  in 
products  of  agriculture,  the  forest,  quarry  and  mine,  or  the 
sea,  lakes  and  rivers,  or  to  any  wholesale  purchaser  or  ship- 
per of  or  dealer  in  live  stock  or  dead  stock  or  the  products 
thereof  upon  the  security  of  the  same. 

To  a  farmer  upon  the  security  of  his  threshed  grain 
grown  upon  the  farm. 

To  an}'  wholesale  viannfacturer  of  goods  upon  the  se- 
curity of  the  goods  actually  manufactured  b}'  him  or  pro- 
cured for  such  manufacture  (a  bank  may  not,  however, 
lend  to  a  manufacturer  upon  the  security  of  any  goods  pro- 
cured by  him  to  be  sold  in  substantially  the  same  condition 
in  which  they  were  received).  No  definition  of  the  term 
"wholesale"  manufacturer,  purchaser,  shipper  or  dealer  is 
given  in  the  Act — in  fact,  it  would  not  be  possible  to  define 
the  term — but  no  difl^iculty,  probably,  will  arise  in  the  ma- 
jority of  cases,  as  the  dividing  line  is  generally  well  defined. 


ADVANCES  ON  ASSIGNMENTS  279 

A  correct  appreciation  of  the  intention  and  legal 
effect  of  the  forms  used  in  this  connection  will  be  help- 
ful. Only  one  form,  the  assignment  or  pledge 
( Schedule  C ) ,  is  given  in  the  Bank  Act.  All  forms, 
however,  are  based  on  a  correct  interpretation  of  the 
act,  and  vary  but  slightly  in  the  different  banks. 
Among  the  more  important  forms  may  be  mentioned : 

1.  The  pledge  or  assigmiient  of  goods  (Figure  48) 

2.  The  promise  to  give  security  (Figure  49) 

3.  The  contract  with  the  customer  respecting  sales, 
insurance  of  goods,  etc.  (Figure  .50) 

4.  The  declaration  by  the  customer  as  to  the 
quality  and  value  of  the  produce  assigned  and  also  a 
statement  as  to  wages  and  other  privileged  claims 
(Figure  51) 

5.  The  note  (Figures  52  and  53).  To  be  used 
with  all  advances  made  under  Sections  86-90. 

3.  Promise. — When  advances  are  made  to  facili- 
tate operations  extending  over  a  season  or  for  a 
certain  period  of  time,  as,  for  instance,  in  a  lumber  or 
grain  business,  it  is  obvious  that  the  bulk  of  the  secur- 
ity will  be  brought  into  existence  in  great  part  by  the 
use  of  the  bank's  money.  A  general  written  promise 
to  give  security  (Figure  49)  must,  therefore,  be  ob- 
tained before  any  advance  is  made,  and  pledges  or 
assigmuents  of  goods  should  be  obtained  as  often  as 
any  property  constituting  the  security  can  be  de- 
scribed or  located.  In  addition  to  "the  promise"  a 
bank  generally  obtains  an  undertaking  from  the  cus- 
tomer  (Figure  50)    regarding  the  insurance  of  the 


280  BANKING  PRACTICE 

goods  in  question,  and  an  agi-eement  as  to  the  sale  of 
the  goods  in  case  of  default  in  payment,  etc.  Fur- 
thermore, each  note  form  refers  to  the  general  prom- 
ise and  supplements  it  (Figure  52).  Casual  loans 
are  made  on  another  form  of  note  (Figure  53),  the 
promise  being  original  and  therefore  calling  for  par- 
ticulars of  goods  and  location. 

It  must  always  be  borne  in  mind  that  the  "prom- 
ise" is  not  in  itself  security ;  it  is  simply  a  contract  to 
give  security,  and  can  only  be  enforced  as  a  contract : 
in  other  words,  it  is  an  equitable  assignment,  in  con- 
tradistinction to  the  pledge  which  is  a  legal  assign- 
ment or  transfer  of  property  actually  existing.  The 
"promise"  confers  upon  the  bank  no  legal  title  to  the 
property  mentioned  in  it,  and  until  a  legal  transfer  in 
form  of  a  pledge  is  made,  the  borrower,  if  dishonest, 
may  sell,  mortgage  or  otherwise  deal  with  the  goods 
intended  to  be  the  bank's  security.  The  penal  pro- 
visions of  the  Bank  Act  are  not  applicable  to  equita- 
ble assignments.  It  is  important,  therefore,  to  obtain 
a  legal  assignment  as  soon  and  as  often  as  there  are 
goods  capable  of  being  transferred.  Under  a  "prom- 
ise" the  bank  is  not  entitled  to  priority  over  unpaid 
vendors,  unsecured  creditors,  or,  in  fact,  to  any 
greater  rights  than  the  customer  himself. 

It  is  important  to  remember  that  when  a  promise 
to  give  security  does  not  exist,  a  bank  cannot,  except 
under  the  substitution  clause  of  Section  88,  claim 
any  right  to,  or  security  upon,  any  other  goods  than 
those  pledged  at  the  time  of  the  advance,  and  even 


ADVANCES  ON  ASSIGNMENTS  281 

these  must  be  specially  described  so  as  to  be  distin- 
guished from  others. 

Care  should  be  taken  to  have  the  written  promise 
include  each  class  of  product  on  which  it  is  at  all  likely 
that  the  bank  may  be  asked  to  lend  during  the  sea- 
son, and  all  places  where  the  customer  is  likely  to 
store  or  warehouse  goods. 

If  a  customer  desires  to  obtain  advances  upon 
goods  of  a  different  nature  from  those  covered  by  the 
original  promise,  or  if  the  goods,  whether  of  the  same 
nature  or  not,  are  stored  in  places  not  mentioned  in 
the  original  promise,  then  a  fresh  promise  should  be 
taken  for  the  amount  of  advances  required  under  the 
new  conditions,  and  a  separate  account  should  be 
opened,  thru  which  must  pass  the  proceeds  of  all  ad- 
vances made  in  accordance  with  the  terms  of  the  sec- 
ond promise.  Under  such  circumstances,  the  pro- 
ceeds of  the  advances  made  under  one  promise  must 
on  no  consideration  be  used  to  repay  advances  made 
under  the  other. 

4.  Assignment. — The  assignment  or  pledge  is  in 
the  exact  form  prescribed  by  the  Bank  Act  or  of 
like  effect  (Figin*e  48),  and  is  a  legal  transfer  to  the 
bank  of  the  title  of  the  customer  to  the  goods  de- 
scribed in  it.  A  legal  acquisition  of  valid  pledges, 
warehouse  receipts  or  bills  of  lading  confers  on  the 
bank  priority  of  claim  over  an  unpaid  vendor.  To 
obtain  title  it  is  necessary  that  the  pledge  should  be 
contemporaneous  with  the  advance,  or  pursuant  to  a 
written  promise  to  give  security  made  either  prior  to 


Security  under  Sec.  88  fok  One  or  more  Pkomsssoby  Notes 

In   consideration    of   advances   of 

dollars  made  by  The  Canadian  Bank  of  Commerce  to 

the  undersigned,  for  wliich  the  said  Bank  holds  the  following  bills  or  notes  made 
by  the  undersigned  : 

Notes  dated 191 ,  due 191 $ 

Here  describe  fully      f     

the  bills  or  notes    -l 

so  taken.  l_     


Rule  out  the  classes 
of  products,  etc., 
not  covered  by 
this  assignment. 


tlie  products  of  agriculture,  the  forest,  quarry  and  mine 

the  products  of  the  sea,  lakes  and  rivers 

the  live  stock  or  dead  stock,  or  the  products  thereof 

the  goods,  wares  and  merchandise 

the  grain 


mentioned  below  are/is  hereby  assigned  to  the  said  Bank  as  secTirity  for  the  pay- 
ment of  the  said  bills  or  notes,  or  renewals  thereof  or  substitutions  therefor  and 
interest  thereon. 

The  security  is  given  under  the  provisions  of  Section  88  of  the  Bank  Act,  and 
is  subject  to  the  provisions  of  the  said  Act. 

The  said 


Rule  out  the  classes 
of  products,  etc., 
not  covered  Ijy 
this  assignment. 


products  of  agriculture,  the  forest,  quarry  and  mine 

products  of  the  sea,  lakes  and  rivers 

live  stock  or  dead  stock,  or  the  products  thereof 

goods,  wares  and  merchandise 

grain 


ai"e/is  now  owned  by  the  undersigned  and  arc  is  now  in  the  possession  of. 


and   are/is   free   from    any   mortgage,    lien,    or   charge   thereon    (except   previous 
assignments  to  tlie  Bank )  and  are  in 

Describe  fully  the     C 

place    or    places     I      

■where  the  goods    "1 


I    ^ 


ituated 


and  are  the  following: 

Insert  as  full  de- 
scription as  pos- 
sible of  goods  as- 
signed, e.g.,  logs, 
lumber,  wlieat, 
etc.,  and  specify 
the  products  on 
hand. 

Dated  at 


.the. 


of. 


N.B. — If  necessary,  for  want  of  space,  the  bilKs  or  notes  or  the  description  of 
the  goods  may  be  set  out  in  .schelule  to  be  annexed,  in  which  case  insert  in  the 
appropriate  spaces  the  words  "those  mentioned  in  the  schedule  hereto." 


Figure  48.     Assigxmext 

282 


ADVANCES  ON  ASSIGNMENTS  283 

or  at  the  time  the  advance  is  made.  When  assign- 
ments are  given  in  connection  with  a  general  or  con- 
tinuous promise  to  give  security,  it  is  advisable  to 
include  all  goods  covered  by  previous  assigmnents 
given  under  that  promise,  by  describing  all  the  prop- 
erty then  in  existence  and  in  the  customer's  possession. 

In  filling  out  an  assignment  all  the  notes  represent- 
ing the  total  advances  to  date  should  be  clearly  de- 
tailed in  the  blank  provided,  and  the  goods  and  the 
places  where  stored  should  be  described  as  definitely 
as  possible. 

The  advance  from  the  bank  should  be  described  as 
it  actually  is  and  not  in  general  terms  such  as  "all  ad- 
vances" used  in  the  written  promise.  Assigmnents 
must  be  given  as  security  for  a  specific  loan  in  money, 
or  for  a  specified  promissory  note  or  notes. 

The  best  description  is  one  which  takes  in  all  goods 
in  a  particular  place,  such  as  the  following:  "all  the 
logs,  lumber,  lath  and  shingles  which  are  now  in  the 
following  place  (s),  namely.  .  .  ."  This  description, 
if  the  place  or  places  are  properly  described,  would 
leave  no  doubt  as  to  what  goods  are  assigned.  It 
would  transfer  the  goods  to  the  bank  subject  to  what- 
ever claim  it  might  already  have  under  previous  as- 
signments and,  in  addition,  all  goods  covered  by  the 
description  that  had  been  added  since  the  date  of  the 
last  previous  assigmnent.  The  words  "except  pre- 
vious assignments  to  the  bank"  should  always  be  left 
in  the  form  when  there  are  previous  assignments. 

Failing  this  general  description,  the  security,  to  be 


284  BANKING  PRACTICE 

good,  must  contain  such  a  definite  description  by 
marks,  location  or  otherwise  as  will  enable  the  bank 
to  identify  the  goods  without  question,  even  if  there 
are  other  goods  of  the  same  kind  in  the  same  place  not 
assigned  to  the  bank. 

A  clear  and  definite  description  of  the  place  or 
places  where  the  property  is  stored  is  as  necessaiy  as  a 
description  of  the  goods  themselves,  and  indeed,  is  an 
essential  part  thereof.  The  ponds,  yards,  etc.,  where 
logs  and  lumber  are  stored,  the  warehouses  about  a 
mill  containing  flour  or  grain  and,  in  fact,  all  the 
places  in  which  the  goods  to  be  assigned  are  situated, 
must  be  described  in  such  a  way  that  there  can  be  no 
doubt  which  particular  places  are  meant,  and  so  that 
if  there  are  other  places  of  a  similar  kind  belonging  to 
the  customer  they  can  be  clearly  distinguished.  Such 
a  description  as  "my  mill"  or  "my  elevator"  if  the 
customer  owned  two  mills  or  two  elevators  would  not 
be  good.  If  the  customer  is  likely  to  use  any  other 
than  the  usual  storage  places  the  phrase  in  the  written 
promise  and  assignment  should  be  made  broad  enough 
to  include  these  also. 

It  is  to  be  noted  that  the  act  authorizes  a  bank  to 
take  assignments  of  goods  whether  in  the  possession 
of  the  owner  or  not.  The  pledge  (Figure  48)  has 
been  framed  to  meet  customary  cases,  but  it  may  be 
altered  to  suit  the  circumstances  when  goods  are  in 
possession  of  another  person,  as,  for  instance,  at  a 
railway  station  where  the  agent  cannot  grant  a  ware- 
house receipt. 


Promise  to  Give  Warehouse  Receipts  or  Security  under  Section  88 

191.... 

to  the  manager 

THE BANK 


Dear  Sir: 

The   bank   is   hereby   requested   by   the   undersigned   to   grant   and 
continue   during   the   current   season    a   revolving   line   of   credit   for 

ray/our business    of 

$ ,  and  to  make  advances  to  the  undersigned  there- 
under either  by  way  of  overdraft  or  in  the  form  of  discounting  bills 
and/or  notes   of  or   for  the   undersigned  on  the   security   of  all   the 


(hereinafter  referred  to  as  "goods")  which  are  now  owned  or  which 
may  be  owned  by  the  undersigned  from  time  to  time  while  any 
advances  made  under  this  credit  remain  unpaid,  and  which  are  now 
or  mav  hereafter  be  in 


situated 


And  the  undersigned  promise  and  agree  to  give  the  said  Bank 
from  time  to  time  security  for  the  said  advances  by  way  of  assign- 
ments under  Section  88  of  the  Bank  Act,  covering  all  the  said  goods 
or  part  thereof,  and/or  bills  of  lading  and/or  warehouse  receipts 
for  goods  of  the  above  kinds  or  some  of  them;  and  you  or  the  Act- 
ing Manager  for  the  time  being  are  hereby  appointed  the  Attorney 
of  the  undersigned,  to  give  from  time  to  time  to  the  Bank  the 
security  above  mentioned  and  to  sign  the  same  on  behalf  of  the 
undersigned. 

The  Bank  may  from  time  to  time  take  from  the  undersigned  bills 
and/or  notes  representing  the  advances  in  whole  or  part.  Such 
bills  and/or  notes  shall  not  extinguish  or  pay  the  indebtedness 
created  by  such  advances  but  shall  represent  the  same  only. 

This  undertaking  is  to  applv  to  all  advances  made  to  the  under- 
signed under  the  said  line  of  credit,  the  intention  being  that  all  said 
goods  which  the  undersigned  may  from  time  to  time  have  in  said 
place (s)  shall  from  time  to  time  be  assigned  to  the  Bank  under 
Section  88,  as  security  for  all  advances,  and  that  all  bills  of  lading 
or  warehouse  receipts  covering  goods  of  the  above  kinds  which  the 
undersigned  may  receive  from  time  to  time  shall  be  given  to  the 
Bank  as  such  security. 

Yours  truly, 


Figure  49 

285 


286  BANKING  PRACTICE 

The  goods  and  their  location  must,  of  course,  be 
similarly  described  in  both  the  written  promise  and 
the  assignment. 


Contract  with  Customers  Respectixg   Warehouse   Receipts,  etc. 

IN  CONSIDERATION  of  the  advances  being  made  to  the  under- 
signed upon  the  security  of  warehouse  receipts  or  bills  of  lading, 
or  upon  security  under  Section  88  of  the  Banlv  Act,  the  undersigned 
consent  and  agree  with  the  Bank  as  follows: 

1.  To  keep  the  property  covered  by  the  warehouse  receipts,  bills 
of  lading,  or  security  given  from  time  to  time,  insured  against  fire 
to  the  extent  of  the  'advances  made  thereon,  or  to  the  full  insurable 
value  thereof  in  case  such  advances  exceed  the  insurable  value,  and 
to  assign  the  policies  to  the  Bank  (or  have  the  loss,  if  any,  made 
payable  to  it).  Should  the  undersigned  neglect  to  keep  up  such 
insurance,  the  Bank  may  insure  and  hold  the  property  as  security 
for  the  premiums  paid  and  interest  thereon,  which  premiums  and 
interest  the  undersigned  will  pay  on  demand. 

2.  Any  sale  of  the  property  covered  by  any  such  warehouse  re- 
ceipt, bill  of  lading,  or  security  under  such  Section  88,  given  or 
which  may  be  given  to  the  Bank  by  the  undersigned,  may  be  by 
private  sale,  if  the  Bank  thinks  fit,— no  advertisement  or  public 
notice  of  sale  or  intention  to  sell  need  be  given, — and  if  three  days' 
notice  of  general  intention  to  sell  be  given  by  registered  letter 
mailed  in  the  Post  Office  and  addressed  to  the  undersigned  at  the 
address  last  known  to  the  Bank,  such  notice  shall  be  sufficient,  and 
the  property  may  be  sold  en  bloc  or  in  smaller  quantities  either  by 
public  auction  or  private  sale  or  partly  by  each  mode,  at  any  time 
after  the  expiration  of  such  period  without  further  notice. 

This  is  to  be  a  continuing  consent  and  agreement,  and  is  to  apply 
to   all   warehouse    receipts,   bills   of   lading   and   securities    (and    the 
property  covered   thereby)    given,   and   which  may  be   given,   to   the 
Bank  bV  the  undersigned. 
Dated   at !^ the day   of ,   191 


Figure  .jO 

An  assigmnent  of  goods  is  continuous  and  follows 
the  relative  goods  thru  all  processes  of  manufacture 
until  the  bank's  security  is  converted  into  the  finished 
article. 

5.  Declaration.— 'EveTj  borrower  under  this  sec- 
tion should  be  required  to  furnish  a  statement  at 


ADVANCES  ON  ASSIGNMENTS  287 

least  monthly,  even  if  estimated,  showing  what  stock 
he  is  holding  at  that  date  under  assignment  to  the 
bank.  This  declaration  (Figm'eol)  is  of  importance, 
because  if  a  manufacturer,  the  pledger  may  have 
changed  the  status  of  the  goods  from  raw  material  to 
manufactured  articles;  or,  if  a  dealer,  he  may  have 
substituted  other  goods  in  the  place  of  those  origin- 
ally pledged.  The  intention  of  the  declaration  is  to 
show,  periodically,  just  what  the  bank's  security  is  at 
stated  intervals.  It  also  keeps  in  the  borrower's  mind 
his  responsibility  to  a  bank,  and  would  show  conclu- 
sively to  a  court  that  a  bank  was  following  these 
goods,  according  to  the  spirit  of  the  act.  The  form 
also  contains  a  statement  as  to  the  amount  of  wages 
or  other  privileged  liens  on  the  goods. 

Particular  attention  is  directed  to  the  prior  rights 
of  wage-earners  under  an  amendment  incidental  to 
the  1913  revision  of  the  act.  Even  if  the  customer 
is  not  in  a  position  to  give  periodically  the  informa- 
tion regarding  quantities  and  values  of  the  products, 
etc.,  assigned,  the  statement  should  nevertheless  be 
taken  with  respect  to  wages,  salaries  and  the  like. 
When  an  exact  inventory  is  taken,  or  a  sufficiently  de- 
tailed declaration  made,  it  would  be  advisable,  in  most 
cases  to  utilize  it  as  a  basis  of  an  assignment. 

It  is  customary  to  make  an  examination  of  the  se- 
curity pledged  at  irregular  intervals,  and  a  manager 
should,  at  all  times,  keep  himself  informed  as  to  the 
fact  that  the  security  is  fully  sufficient  to  protect  the 
advances.     At  the  same  time,  even  with  the  best  sur- 


288  BANKING  PRACTICE 

veillance,  so  much  depends  on  the  integrity  of  the 
pledger  that  a  bank  should  not  consider  making  ad- 
vances in  this  form  unless  the  applicant  is  a  person 
of  unquestioned  integrity,  with  a  previous  record 
which  leaves  no  doubt  on  the  subject. 


191.... 

TO   THE    MANAGER 

THE BANK 


The  undersigned  submits  tlie  following  true  statement  of  products, 

stock,  merchandise,  grain,  etc.,  and  values  thereof  as  at 

J    assigned    to    The Bank    under 

Section  88  of  the  Bank  Act  by  the  undersigned  as  security  for 
advances  made  by  the  said  Bank  to  the  undersigned.  The  said 
products,  stock,  merchandise,  grain,  etc.,  are  free  from  any  mort- 
gage, lien  or  charge  thereon,  except  previous  assignments  to  the 
Bank.     The    wages,    salaries    or    other    remuneration    owing   by    the 

undersigned  to  persons  employed  do  not  now  exceed  $ 

of  which  not  exceeding  $ are  in  arrears.  The  under- 
signed  hereby   agrees   with   The Bank   that   should 

this  statement  be  found  incorrect,  then  you  or  the  Acting  Manager 
for  the  time  being  may  declare  to  be  due  and  payable  all  moneys 
owing  by  the  undersigned  to  the  Bank  and  all  bills  and  notes  held  by 
the  Bank  in  respect  thereof,  and  on  such  declaration  being  made, 
the  said  moneys  and  bills  and  notes  shall  thereupon  become  and  be 
due  and  payable. 


(Statement  follows  showing  quantities,  values,  insurance,  etc.) 


Figure  51 
Declaration 


In  making  advances  under  promise  to  give  security 
it  is  a  general  principle  that  the  money  the  bank  ad- 
vances should  go  directly  into  the  creation  of  the 
goods  intended  to  be  pledged.  No  portion  should  be 
diverted  to  any  other  purpose.  This  is  an  important 
matter  and  should  be  checked  constantly,  even  if  it 
is  necessary  to  make  a  special  visit  in  the  early  stages 


ADVANCES  ON  ASSIGNMENTS  289 

of  the  operations.  The  time  to  do  it  is  at  the  begin- 
ning of  operations  before  the  money  can  be  diverted 
into  fixed  assets  or  plant. 

In  the  case  of  a  large  company  the  fact  that  the 
funds  have  been  placed  in  actual  production  is  often 
an  intricate  question  to  decide,  being  shown  by  the 
concuiTence  of  several  lines  of  evidence,  the  scale,  in- 
ventory sheets,  state  of  the  books,  etc.  It  is  there- 
fore advisable  that  there  should  be  an  understanding 
that  these  are  open  to  the  bank  if  it  sees  fit  to  send  an 
auditor  at  any  time. 

Care  should  be  taken  to  see  that  all  workmen  and 
artisans  are  paid  within  a  reasonable  time  and  that  no 
privileged  liens  for  wages  are  demandable,  in  fact, 
that  no  preferential  claim  exists  on  the  stock.  Full 
insurance  in  a  bank's  favor  in  satisfactory  companies 
should  always  be  held  upon  goods  and  the  policies  re- 
tained in  the  bank's  possession. 

Insurance  held  upon  goods  under  assignment  must 
not  be  regarded  as  effective  security  should  fire  occur, 
for  if  the  goods  were  not  there  to  be  destroyed,  the  in- 
surance company  would  not  pay.  The  loss  has  to  be 
proved.  It  must  not  be  assumed  that  the  existence 
of  a  policy  of  insurance  is  any  evidence  of  the  exist- 
ence of  the  merchandise  which  it  is  supposed  to 
cover. 

6.  The  note. — Altho  an  ordinary  promissory  note 
form  can  be  used  in  conjunction  with  either  the  prom- 
ise or  the  assignment,  it  has  been  found  more  con- 
venient in  practice  to  adopt  a  special  form  of  note 

XVI— 20 


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292  BANKING  PRACTICE 

(Figure  52  or  53),  with  a  promise  to  give  securitj^ 
appended  thereto.  Both  the  note  and  the  promise 
require  to  be  signed.  This  form  should  be  used  in 
connection  with  all  advances  under  Sections  86-88-90. 
The  note  should  preferably  be  drawn  on  demand,  as 
then  the  original  note  will  remain  current  in  the  pos- 
session of  the  bank  until  the  loan  is  retired.  When 
taken  on  demand,  the  note  is  made  to  read  with  inter- 
terest,  which  is  collected  monthy.  If  advances  are 
made  on  time  notes,  they  will  have  to  be  renewed,  and 
the  old  notes  and  all  other  documents  retained,  to 
show  the  continuity  of  the  transaction.  The  file  will 
show,  therefore,  the  current  note  and,  attached  there- 
to, any  renewed  notes,  the  promise  (if  any),  the 
pledge  and  the  insurance  policies.  Where  an  account 
is  operated  under  a  general  promise  it  is  not  necessary 
to  repeat  the  descriptions,  and  a  note,  similar  to 
Figure  52,  is  used. 

7.  Making  advances. — Before  making  advances  the 
manager  should  be  able  to  answer  the  following  ques- 
tions : 

1.  Is  the  customer  a  wholesale  dealer,  manufac- 
turer or  farmer  within  the  meaning  of  the  act? 

2.  Are  the  goods  of  such  a  character  that  they  can 
be  held  as  security  under  the  act  ? 

3.  Does  the  character  and  standing  of  the  appli- 
cant for  the  loan,  entitle  him  to  consideration? 

4.  Has  he  had  sufficient  experience  to  insure  a  suc- 
cessful outcome  of  the  transaction? 


ADVANCES  ON  ASSIGNMENTS  293 

5.  If  there  is  an  advance  on  the  warehouse  receipt, 
is  the  warehouseman  unquestionably  rehable? 

6.  Has  the  borrower  sufficient  means  to  supplement 
the  margin  on  the  goods  in  case  of  depreciation? 

7.  Are  there  any  unpaid  vendors  or  has  the  bor- 
rower large  outside  liabilities  which  might  lead  to 
trouble  or  litigation? 

8.  Will  the  insurance  requirements  of  the  bank  be 
complied  with? 

9.  If  a  farmer,  is  there  a  definite  understanding  as 
to  the  eventual  sale  of  the  grain? 

10.  Is  the  procedure  under  which  the  account  is  to 
be  conducted  perfectlj^  clear  to  the  customer  and  the 
bank  staff? 

If  these  questions  can  be  satisfactorily  answered 
the  manager  is  in  a  position  to  recommend  the  credit. 

Whenever  possible  the  property  upon  which  ad- 
vances are  to  be  made  should  be  examined  by  the  man- 
ager with  a  view  to  ascertaining  where  and  what  it  is, 
and  he  should,  subsequently^  be  able  to  identify  it  if 
necessary.  The  goods  must  be  particularly  described 
both  in  the  promise  and  the  assignment,  and  there 
must  be  no  mistake  as  to  where  they  are  stored. 

As  already  noted,  if  the  advances  are  to  be  con- 
tinued during  a  season's  operations,  the  general  prom- 
ise and  other  forms  should  be  taken  in  addition  to  the 
note.  If  the  advance  is  of  a  casual  nature,  it  will  be 
necessary  to  take  only  the  note,  the  assigmnent  and 
the  contract  in  regard  to  insurance. 


294  BANKING  PRACTICE 

A  reasonable  margin  should  be  maintained  at  all 
times,  depending  upon  the  class  of  security.  If  the 
margin  will  permit  and  further  advances  are  subse- 
quently necessary,  for  instance,  in  order  to  saw  logs, 
for  the  purchase  of  which  the  original  advance  was 
made,  or  for  additional  expenditure  in  manufactur- 
ing, it  is  permissible  to  make  additional  advances  and 
take  additional  assignments.  These  should,  of  course, 
recapitulate  all  the  security  in  the  original  assignment, 
including  additional  goods,  if  any.  But  under  no 
circumstances  must  the  original  pledge  be  renewed, 
the  goods  being  carried  out  to  their  final  realization 
on  each  pledge  given. 

All  that  is  here  said  as  to  taking  assignments  ap- 
plies equally  to  warehouse  receipts,  provided  these 
cover  property  which  is  clearly  a  portion  of  that  de- 
scribed in  the  promise.  There  could  be  no  doubt  on 
that  point  if  the  promise  is  to  give  security  by  assign- 
ment of  all  the  grain,  etc.,  now  held  or  hereafter  held 
by  the  customer,  or  by  warehouse  receipts  covering 
the  same  or  any  part  thereof,  as  the  printed  form  pro- 
vides. It  may  be  well  to  mention  that  the  taking  of 
the  subsequent  warehouse  receipts  or  assignments  re- 
ferred to  above  is  not  a  suhstitution.  The  customer 
has  promised  that  he  will  from  time  to  time  give  secur- 
ity on  all  his  goods  for  all  his  advances.  The  subse- 
quent assignments,  therefore,  are  not  substituted  for 
previous  security,  but  are  given  in  addition  and  in  ful- 
filment of  his  promise  to  give  security  on  the  particu- 
lar goods  covered  thereby. 


ADVANCES  ON  ASSIGNMENTS  295 

It  should  be  distinctly  understood  that  the  proceeds 
of  all  loans  under  Sections  86-90  must  be  used  by  the 
borrower  for  current  expenditure  in  connection  with 
his  business,  and  no  portion  of  them  must  be  applied, 
either  directly  or  indirectly,  in  settlement  of  any  pre- 
vious existing  loan  to  the  bank. 

Altho  not  essential,  it  is  found  more  convenient  in 
most  cases  to  have  two  accounts ;  first,  the  customer's 
current  account,  from  which  his  regular  disbursements 
can  be  made  and  to  which  proceeds  of  the  advances 
under  this  section  would  be  credited;  second,  a  col- 
lateral account,  into  which  all  the  proceeds  derived 
from  the  goods  pledged  should  be  credited  and 
from  thence  applied  on  the  loan.  By  this  method  of 
carrying  collaterals  the  same  rate  of  interest  may  be 
credited  as  is  charged  on  the  loan  on  which  it  is  finally 
applied.  It  should  be  noted  that  an  overdraft  should 
not  be  permitted  in  the  current  account  of  a  customer 
borrowing  under  Section  88. 

8.  Warehouse  receipts. — The  bank  may  acquire 
and  hold  warehouse  receipts  and  bills  of  lading  as  col- 
lateral security  for  the  payment  of  any  debt  incurred 
in  its  favor,  but  it  is  necessary  that  the  warehouse  re- 
ceipt be  acquired  at  the  time  the  advance  is  made  or 
pursuant  to  a  wi'itten  promise  to  give  security  made 
prior  to  the  time  the  advance  is  made.  Loans  may  be 
made  by  the  bank  to  any  person  upon  any  goods, 
wares  or  merchandise  covered  by  warehouse  receipts 
or  bills  of  lading.  In  lending  on  the  security  of  ware- 
house receipts  or  bills  of  lading,  it  is  not  necessary  that 


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ADVANCES  ON  ASSIGNMENTS  297 

a  customer  should  be  a  manufacturer  or  wholesale 
shipper  or  dealer,  as  in  the  case  of  advances  made 
under  Section  88. 

A  definition  of  a  warehouse  receipt  is  given  in  Sec- 
tion 2  of  the  Bank  Act.  In  making  advances  on 
warehouse  receipts  an  ordinary  note  form  or,  prefer- 
ably, the  special  form  (Figure  53)  can  be  used.  Al- 
tho  the  delivery  of  a  warehouse  receipt  constitutes  a 
legal  transfer,  it  is  generally  considered  advisable  to 
take  an  ordinary  pledge  or  to  use  a  special  form 
(Figure  55) .  Immediately  an  advance  is  made  on  a 
warehouse  receipt,  the  warehouseman  should  be  no- 
tified and  his  acknowledgment  received. 

9.  Substitution. — Section  88  of  the  Bank  Act  au- 
thorizes a  bank  to  allow  pledged  goods  taken  from  a 
wholesaler,  purchaser  or  shij^per  to  be  removed  and 
other  goods  substituted  therefor.  The  permission  to 
substitute  is  accompanied  by  so  many  restrictions  that 
its  use  should  be  avoided  whenever  possible,  and 
never  allowed  until  the  individual  conditions  have  been 
looked  into  and  the  proper  procedure  decided  on. 

It  is  important  to  note  that  the  provision  for  substi- 
tution is,  in  the  first  instance,  expressed  as  condi- 
tional upon  the  consent  of  the  bank,  and  tho  failure  to 
obtain  such  consent  does  not  affect  the  validity  of  the 
security,  there  should  always  be  an  understanding 
with  the  customer  that  the  goods  are  not  to  be  re- 
moved without  the  bank's  previous  consent.  As  a 
rule,  in  an  active  account,  it  is  not  feasible  to  re- 
quire a  customer  to  obtain  the   bank's  consent  to 


Hypothecation  of  Warehouse   Receipts  axd/or  Biils  of  Ladixg 


WAREHOUSE  RECEIPTS  and/or  BILLS  OF  LADING  ACQUIRED 
BY  THE   BANK  as  Collateral  Security 


Xo. 


W/RofB/L 


Issues 


Descriptioii  of  Gfoods 


The  above-mentioned  Warehouse  Receipts  and/or  Bills  of  Lading  are 
to  be  held  by  the  Bank  as  security  for  the  payment  of  the  indebtedness 
of  the  undersigned,  as  follows: 
Note   dated 191 ,   due 191 S 


or  renewal  (s)  thereof  or  substitution  (s)  therefor,  and  interest  thereon. 
The  goods  covered  by  the  above-mentioned  securities  may  be  realized 
by  the  Bank  in  such  manner  as  may  seem  to  it  advisable,  and  without 
notice  to  the  undersigned,  in  the  event  of  any  default  in  payment  of  the 
said  indebtedness.  The  proceeds  may  be  held  in  lieu  of  what  is  realized, 
and  may  as  and  when  the  Bank  thinks  fit,  be  appropriated  on  account 
of  such  parts  of  said  indebtedness  as  to  the  Bank  seems  best. 

FiGt'RE   ;>5 


298 


ADVANCES  ON  ASSIGNMENTS  299 

remove  the  goods  for  each  day's  shipment,  and  the 
only  practicable  plan  appears  to  be  to  have  a  general 
understanding  with  the  customer  (Figure  56)  that  he 
may  remove  goods  from  time  to  time  and  substitute 
others  of  the  same  character  and  equal  value;  that  is, 
of  course,  to  such  an  extent  as  the  proceeds  of  the 
goods  removed  are  not  ajiplied  directly  to  reduce  the 
advances. 

Under  the  system  of  taking  a  general  promise  (as 
well  as  a  promise  with  each  note  discounted)  to  give 
security  on  all  the  goods  which  the  customer  may  have 
from  time  to  time  in  certain  named  places,  and  tak- 
ing assignments  at  frequent  intervals,  the  value  of  the 
clause  respecting  substitutions  is,  in  many  instances, 
not  important.  It  would  be  of  benefit,  however,  un- 
der certain  circumstances,  for  instance,  where  goods 
have  been  removed  and  others  taken  into  stock  subse- 
quent to  the  date  of  the  last  assignment  and  the  bor- 
rower failed  or  was  seized  up.  In  such  a  case,  if  the 
goods  were  of  substantially  the  same  character  as 
those  which  they  replaced,  the  bank  would  have  a  right 
to  hold  them  under  the  last  assignment. 

Speaking  generally,  it  may  be  said  that  the  benefit 
of  this  clause  will  be  most  felt  when  security  has  been 
taken  upon  any  stock  of  grain,  minerals,  logs,  live 
stock,  etc.,  at  a  time  when  the  quantity  of  stock  is  at 
the  highest  point.  The  removal,  with  the  bank's  con- 
sent, of  a  portion  of  the  goods,  and  the  substitution  of 
other  goods  of  the  same  character,  would  leave  the  as- 
signments applicable  to  all  the  remaining  stock. 


I 1 

I 

191.. 

THE   BANK  pursuant  to 

Section  88  of  the  Bank  Act  hereby,  until  this  provision  is 
withdrawn,  allows    

to  remove  from  time  to  time  in  the  ordinary  course  of  busi- 
ness, for  the  purpose  of  delivering  the  same  to  purchasers 
thereof,  the  products,  goods,  wares  and  merchandise,  live 
stock  or  dead  stock  or  the  products  thereof,  or  any  por- 
tion or  portions  thereof,  on  the  security  of  which  the  Bank 
has  lent  or  may  lend  him/them  money  under  the  provisions 
of  said  Section,  and  to  substitute  respectively^  therefor 
other  products,  goods,  wares  and  merchandise,  live  stock 
or  dead  stock  or  the  products  thereof,  respectively  of  sub- 
stantially the  same  character. 

For  The Bank 


MANAGER 


The    u^rDERSIG>^ED,   in    consideration   of   the    foregoing   permission, 

Iiereby  agree    . .   with   The Banlv  not  to  remove 

any  of  the  said  products,  goods,  wares  and  merchandise,  live  stock 
or  dead  stock  or  the  products  thereof,  in  respect  of  which  the  said 
permission  is  given  otherwise  than  in  accordance  therewith,  and 
within  a  reasonable  time  from  anj^  such  removal  (what  shall  be  a 
reasonable  time  in  each  and  any  case  to  be  determined  by  the  INIan- 

ager   for   the  time   being  of   The. .' Bank   at 

,    whose    decision    shall   be    final)    to   substitute 

respectively  for  the  products,  goods,  wares  and  merchandise,  live 
stock  or  dead  stock  or  the  products  thereof  so  removed  other  goods, 
wares  and  merchandise,  live  stock  or  dead  stock  or  the  products 
thereof  respectively  of  substantially  the  same  character  as  and  of 
not  less  value  than  those  so  removed,  and  in  case  of  breach  of  this 
agreement  the  undersigned  agree  . .  that  the  said  Manager  may  during 
the  continuance  of  such  breach  declare  to  be  due  and  payable  all 
moneys  owing  by  the  undersigned  to  the  Bank  and  all  bills  and  notes 
held  by  the  Bank  in  respect  thereof,  and  on  such  declaration  being 
made  the  said  moneys  and  bills  and  notes  shall  thereupon  become  and 
be  due  and  payable. 


Figure  56 

StJBSTrruTiON  Agreement 
300 


ADVANCES  ON  ASSIGNMENTS  301 

It  will  be  observed  that  under  this  clause  the  right 
to  substituted  goods  will  not  depend  on  an  assignment 
being  taken  after  the  substituted  goods  are  required, 
but  on  having  an  assignment  covering  the  original 
goods  for  which  the  new  goods  have  been  substituted. 
This  is  an  added  reason  for  keeping  all  the  assign- 
ments until  all  the  advances  to  a  customer  are  cleaned 
up  for  the  season. 

10.  "Current  season." — There  is  no  special  limit 
to  the  time  during  which  the  bank  can  hold  security 
on  goods  properly  assigned  to  it.  For  example, 
an  assignment  from  a  grain  customer,  dated  Au- 
gust, would  be  effective  in  the  following  year  provided 
the  actual  grain  was  still  on  hand  in  the  following 
August. 

The  question  of  season  is  one  which  involves  some 
difficulty  in  the  case  of  accounts  of  tanners  and 
other  manufacturers,  whose  business  goes  on  unbroken 
from  year  to  year,  so  that  it  is  hard  to  say  where  their 
season  begins  or  ends.  But  there  can  be  no  risk  in 
making  the  promise  apply  to  the  recognized  term  for 
bank  credits — that  is,  one  year  following  the  date  of 
the  promise  only. 

In  the  case  of  advances  which  are  not  retired  in  full 
within  the  year,  it  is  advisable  to  act  on  the  theory 
that  a  general  promise  would  not  be  applicable  to  ad- 
vances made  after  the  expiration  of  the  particular  sea- 
son of  the  customer's  business  to  which  it  refers.  The 
general  promise,  however,  undertakes  to  give  security 
by  way  of  assignment  from  time  to  time  "while  any 


302  BANKING  PRACTICE 

advances  made  under  this  credit  remain  unpaid,"  and 
under  this  clause  a  bank  would  be  entitled  to  continue 
taking  assignments  for  loans  carried  over  the  end  of 
the  season  until  such  time  as  they  are  entirely  cleaned 
up.  Renewals  of  notes  representing  advances  carried 
over  the  end  of  the  season  should  not  be  merged  with 
notes  representing  new  advances,  and  the  former 
should  be  liquidated  first.  It  is  not  necessary,  how- 
ever, to  take  separate  assignments  for  the  renewals,  if 
any,  of  advances  carried  over. 

While  assignments  of  new  goods  may  be  taken  for 
advances  carried  over  the  end  of  the  season,  and  while 
the  same  form  of  assignment  may  be  used  for  new  and 
old  advances,  the  proceeds  of  advances  on  a  new  sea- 
son's account  should  not  be  used  to  liquidate  any  por- 
tion of  the  advances  carried  over  from  the  previous 
season.  This  requirement  can  best  be  observed  by 
opening  new  accounts  in  both  the  liability  and  deposit 
ledgers  for  the  new  season's  business,  and  keeping  the 
old  season's  business  entirely  separate. 

When  the  old  liability  account  is  fully  liquidated  the 
old  deposit  account  may,  of  course,  be  closed. 

It  should  be  borne  in  mind  that  the  object  aimed  at 
in  conducting  separate  accounts  is  to  make  sure  that 
not  a  single  dollar  of  indebtedness  which  existed  before 
the  new  promise  was  taken  is  paid  out  of  the  proceeds 
of  the  advances  charged  to  the  new  liability  account. 

11.  Default. — Provision  is  made  in  the  Bank  Act 
(sub-section  3  of  Section  88)  for  the  sale  of  goods,  in 
case  the  bank  finds  it  necessary  to  realize  on  its  secur- 


ADVANCES  ON  ASSIGNMENTS  303 

ity,  owing  to  the  non-payment  of  the  debt.  A  distinc- 
tion is  made  between  products  of  the  forest  and  other 
goods.  For  the  former  the  law  requires  that  thirty 
daj^s'  notice  should  be  given  the  pledger;  if  it  concerns 
other  goods,  only  ten  days'  notice  of  the  time  and 
place  of  sale  is  required.  In  both  cases,  however,  the 
sale  must  be  by  public  auction  and  after  due  adver- 
tising in  at  least  two  local  papers.  In  the  Province 
of  Quebec  one  of  the  papers  must  be  in  French.  If, 
however,  the  consent  in  writing  of  the  pledger  had 
been  obtained  the  above  procedure  is  unnecessary,  and 
the  sale  can  be  proceeded  with  at  convenience.  ( Fig- 
ure 50.) 

There  are  four  penalties  in  the  Bank  Act  which 
refer  particularly  to  Sections  86-90.  These  are  set 
forth  in  Sections  141-2-3-4.  A  bank  is  subject  to  a 
fine  if  it  takes  security  for  a  pre-existing  debt,  or  fails 
to  comply  with  the  requirements  of  the  act  in  connec- 
tion with  the  sale  of  goods  in  case  of  the  default  of  the 
borrower.  It  is  an  indictable  offense  for  any  person 
to  make  a  false  statement  in  any  warehouse  receipt  or 
pledge,  or  alienate  any  part  of  the  bank's  security  un- 
der such  pledge.  The  two  latter  clauses  should  be 
printed  on  the  warehouse  receipt  or  otherwise  brought 
to  the  attention  of  those  interested. 

12.  General  remarks. — The  whole  question  of  mak- 
ing advances  under  Sections  86-90  demands  careful 
study  of  the  Act,  as  well  as  of  the  definite  instructions 
issued  by  every  head  office  on  the  subject.  Losses  are 
generally  made  by  banks  in  connection  with  loans  un- 


304  BANKING  PRACTICE 

der  this  section,  due  to  carelessness  in  the  details  of 
taking  the  security.  In  some  cases  banks  have  lost 
their  rights  to  the  security.  Security  taken  under  this 
section  gives  a  bank  preference  over  other  creditors  be- 
cause the  bank  created  its  own  security  by  advancing 
the  money,  and  in  the  event  of  the  failure  of  a  cus- 
tomer this  preference  may  be  attacked.  If  any  flaws 
exist  in  the  security  a  bank  has  practically  no  defense. 
Where  this  class  of  security  is  taken,  therefore,  it  is 
essential  that  the  procedure  be  strictly  in  accordance 
with  the  legal  requirements,  if  the  security  is  to  be  at 
all  relied  on. 

The  most  important  thing  to  remember  is  that  the 
security  under  this  section  cannot  be  taken  to  secure 
any  pre-existing  debt,  and  to  obtain  title  it  is  neces- 
sary that  the  pledge  should  be  contemporaneous  with 
the  advance,  or  pursuant  to  a  written  promise  to  give 
security  either  prior  to  or  at  the  time  the  advance  is 
made. 

When  a  manager  has  had  little  or  no  experience  in 
this  class  of  loan,  it  is  advisable  that  in  making  appli- 
cation for  the  credit  he  should  outline  the  necessary 
procedure  as  he  understands  it,  referring  to  the  forms 
he  intends  to  use  in  this  connection.  Head  office,  in 
reply,  will  correct  or  confirm  his  conclusions.  Assur- 
ance is  thus  made  doubly  sure. 

As  already  mentioned,  the  above  brief  explanation 
of  this  important  class  of  loan  is  not  intended  for  di- 
rect application,  but  rather  as  a  general  commentary 
on  the  specific  instructions,  which  are  included  in  the 


ADVANCES  ON  ASSIGNMENTS  305 

rule  book  of  every  bank.  It  is  boped,  bowever,  tbat 
tbis  cbapter  will  prove  belpful  to  any  wbo  bave  not 
bad  sufficient  opportunity  to  gi-asp  tbe  spirit  wbicb 
actuates  tbe  law. 

REVIEW 

Under  what  circumstances  does  the  Bank  Act  permit  banks  to 
make  advances  to  wholesale  purchasers  of  goods?  To  wholesale 
manufacturers  ? 

What  is  an  assignment? 

Why  is  a  declaration  important? 

What  information  must  the  manager  have  before  making  ad- 
vances ? 

What  conditions  govern  loans  on  warehouse  receipts? 


XVI— 21 


CHAPTER  IX 

INTERNAL  INSPECTION 

1.  Branch  inspection. — At  irregular  intervals  and 
at  least  once  a  year  every  branch  is  visited  by  an  in- 
spector and  his  assistant  from  the  head  office,  and  a 
thoro  audit  of  the  books  and  assets  of  the  office  is  made. 

An  inspection  consists  of  two  kinds  of  examinations, 
namely,  verification  and  valuation.  The  first  is  called 
the  audit  or  routine  inspection,  and  consists  of  an 
audit  of  all  the  books,  and  a  verification  of  the  physi- 
cal existence  of  the  assets  of  the  branch,  as  w^ell  as  the 
correctness  of  the  liabilities.  All  routine  matters  are 
carefully  checked  to  see  if  the  head  office  instructions 
are  being  conformed  with. 

The  first  part  of  the  inspection  is  made  by  a  routine 
inspector,  or,  as  he  is  sometimes  called,  audit  officer, 
who  either  accompanies  or  precedes  the  senior  inspec- 
tor, with  one  or  more  assistants,  according  to  the  size 
of  the  branch. 

The  second  phase  or  inspection  proper  is  made  by  a 
senior  inspector,  and  consists  of  a  thoro  analysis  and 
valuation  of  the  loans  and  other  assets  of  the  branch. 
The  senior  inspector's  particular  duty  is  to  discuss 
with  the  manager  the  inspection  liability  return  with 

306 


INTERNAL  INSPECTION  307 

a  view  to  obtaining  a  valuation,  as  correct  as  possible, 
of  the  loans  and  securities  held  by  the  branch. 

To  be  a  good  inspector  requires  special  training  and 
qualifications.  In  the  first  place,  a  thoro  knowledge 
of  all  conditions  of  branch  work  is  essential,  and  this 
training  can  be  acquired  only  thru  actual  experience 
in  branch  positions,  from  that  of  manager  down- 
ward. 

The  inspector  follows  the  audit  officer  as  soon  as 
the  inspection  report  on  liabilities  is  completed,  tho 
in  the  case  of  small  branches,  which  have  but  few 
large  loans,  the  habilities  can  be  discussed  by  the  rou- 
tine inspector  or  by  correspondence,  and  a  visit  from 
an  inspector  is  therefore  not  necessary. 

2.  The  audit. — Altho  the  work  involved  by  an  audit 
is  too  specific  to  be  dealt  with  fully  in  this  chapter,  a 
brief  consideration  of  its  methods  and  requirements 
will  be  of  value  in  emx^hasizing  some  of  the  essential 
features  of  Canadian  practice.  Practically  all  banks 
are  similar  in  their  method  of  auditing,  tho  with  some 
the  examination  may  be  more  exhaustive  and  search- 
ing. The  following  procedure  may  be  considered  as 
fulfilling  the  requirements  of  an  average  audit : 

The  audit  officer  and  his  staff  of  assistants  time 
their  arrival  in  a  town  so  as  to  reach  the  office  at  the 
close  of  the  day's  business,  and  thus  interfere  as  little 
as  possible  with  the  service  to  the  pubhc.  Their  ar- 
rival is,  of  course,  unheralded.  Immediately  on  en- 
tering the  office,  control  of  the  safe  is  obtained  and  the 
following  taken  into  custody: 


308  BANKING  PRACTICE 

Treasury  and  teller's  cash,  etc. 

Bill  cases  containing  discounts,  collateral  notes,  collec- 
tions, etc. 

Cash  books,  vouchers  for  the  day,  including  letters  re- 
ceived. 

Current  account,  general  and  saving  ledgers. 

Collection  register. 

3.  Cash  and  securities. — The  auditor  then  proceeds 
to: 

Count  in  detail  the  teller's  cash  and  the  treasury  cash. 

Take  charge  of  deposits  made  for  the  clearing  house  and 
see  that  they  are  credited  by  other  banks  the  following  day 
without  deductions,  or  if  deductions  are  made,  ascertain 
their  nature. 

Obtain  verifications  of  balances  due  to  or  by  other  banks. 

Ascertain  from  the  teller's  cash  statement  book  whether 
or  not  the  cash  has  been  examined  in  detail  at  irregular  in- 
tervals at  least  twice  a  month. 

See  that  a  satisfactory  explanation  is  entered  In  the 
teller's  cash  statement  book  opposite  each  important  cash 
over  and  cash  short  item. 

Check  list  of  collateral  securities  with  the  securities  them- 
selves and  with  the  register. 

Examine  all  life  and  fire  insurance  policies  and  see  that 
they  are  properly  assigned  to  the  bank  and  otherwise  in 
form. 

See  that  all  securities  are  properly  hypothecated  and 
otherwise  in  order. 

Check  list  of  securities  held  for  safe-keeping  with  the 
documents  or  packages  themselves. 

Send  lists  of  all  negotiable  securities  held  as  collateral 
or  for  safe-keeping  for  verification  by  owners. 

Verify  existence  of  loans,  trade  bills,  and  past  due  bills, 
initialing  for  each  item  in  the  diary  or  past  due  bills  register. 

Make  a  summation  of  the  totals  in  the  bill  diary  and 
compare    with    balances    in    the    general    ledger.     The    bill 


INTERNAL  INSPECTION  309 

diary  should  be  kept  in  the  custody  of  the  inspecting  offi- 
cers from  the  time  they  begin  to  check  the  bills  until  the 
totals  have  been  verified. 

Examine  bills.  Take  a  memorandum  of  all  items  not 
correctly  drawn  in  every  respect,  and  hand  them  to  the 
manager  or  accountant  to  be  put  in  order  as  soon  as 
possible. 

Verify  the  existence  of  local  collections  and  collateral 
bills  held,  checking  off  each  item  with  its  relative  entry  in 
the  collection  diary. 

See  that  all  collections  outstanding  in  the  collection  reg- 
ister are  properly  accounted  for. 

Examine  collections  and  collateral  bills,  ascertaining  regu- 
larity' of  acceptance  and  correctness  of  due  dates. 

Mail  to  branches  and  correspondents  for  verification, 
lists  of  trade  bills  remitted,  collateral  bills  remitted  and 
items  outstanding  in  cash  item  account. 

4.  The  ledgers,  etc. — 

Call  off  the  day's  checks  and  deposits  and  other  vouchers 
with  cash  book,  and  compare  cash  book  entries  with  cur- 
rent account  and  savings  ledgers. 

Take  a  rough  list  of  current  account  balances  and  out- 
standing checks,  and  afterward  instruct  ledger-keeper  to 
balance  ledger  in  the  usual  way  in  his  balance  book. 

Take  off  balance  from  savings  ledgers,  listing  balances  on 
inspection  return. 

When  the  current  account  ledger  has  been  balanced,  call 
off  balances,  initialing  the  balances  in  the  ledger  and  com- 
paring them  with  list  previously  prepared. 

Check  general  ledger  balance  sheet,  initialing  balances  in 
the  general  ledger. 

Examine  each  ledger  heading  in  the  current  account  and 
savings  ledgers  and  see  if  all  particulars  required  have  been 
entered,  also  if  rules  regarding  loose-leaf  sheets  have  been 
observed. 

Check  all  entries  for  authorities,  powers  of  attorney,  etc., 
with  list  of  authorities  held. 


310  BANKING  PRACTICE 

See  that  proper  entries  have  been  made  in  deposit  re- 
ceipt account  in  the  general  ledger  for  all  receipts  issued 
and  paid  since  last  inspection. 

Examine  indorsements  on  receipts  paid  since  last  inspec- 
tion, and  see  that  they  are  tied  up  and  scaled  with  the  in- 
spector's private  seal. 

Examine  powers  of  attorney,  resolutions  and  documents 
respecting  signing  officers. 

Check  date  of  last  certification  of  each  ledger  balance. 

See  that  certificates  are  properly  filled  in  and  signed. 

5.  Sundries. — 

Compare  inspection  liability  sheets  prepared  by  the  staff 
with  liability  ledger. 

Examine  entries  in  cash  item  register  since  date  of  last 
inspection,  noting  any  items  outstanding  an  undue  length 
of  time. 

Ascertain  if  any  items  have  been  put  thru  as  cash  items 
which  should  have  been  shown  on  discount  return  as  trade 
bills  remitted. 

See  that  the  following  books  and  records,  etc.,  are  prop- 
erly kept: 

Manager's  diary 

Discrepancy   book 

Record  of  lost  drafts,  stopped  checks,  etc. 

Overdrafts  register 

Circular  book 

Overdue  debt  register 

Postage  account 

Record  of  examination  of  bank  premises 

Character  card  file 

Receipt   for  duplicate  keys,   etc. 

Rates  book 

Record  of  mercantile  agency  reports  received. 

The  following  lists  and  statements  are  prepared  by 
the  staff  and  handed  to  the  manager  or  accountant, 


INTERNAL  INSPECTION  311 

and  when  checked  and  completed  by  them  given  to 
the  inspector: 

Adjustments 

Assignments  of  goods 

Balance  sheet,  general  ledger 

Bank  premises,  safes  and  vaults 

By-laws,  minutes,  etc.,  list  of 

Comparative  statement  of  condition  of  branch 

Current  account  balances 

Deposit  receipts  outstanding 

Drafts  issued  accounts 

Insurance  policies  held — fire 

Insurance  policies  held — life 

Letters  of  credit  outstanding 

Letters  of  guarantee 

Liabilities  of  customers 

Partnership  agreement 

Past  due  bills,  list  of 

Powers  of  attorney,  list  of 

Reports  on  officers 

Securities,  collateral 

Securities,  safe-keeping 

Sterling  exchange  purchased  and  current 

Trade  bills  remitted,  summary  of 

Verifications,  current  accounts 

Verifications,  letters  of  credit 

Verifications,  trade  and  collateral  bills  remitted 

Warehouse  receipts,  loans  on 

Waivers 

6.  Inspection  liahility  return. — This  return  shows 
every  liability  in  detail  whether  overdue  or  not.  The 
names  of  all  obligants  should  be  in  strict  alphabetical 
order,  and  the  totals  of  the  loans  and  trade  bills  in 
each  account  should  be  shown  in  the  proper  column 
opposite  the  names  of  the  customers.     All  securities 


312  BANKING  PRACTICE 

should  be  shown  in  detail  with  the  manager's  estimate 
of  values.  The  following  information  should  appear 
in  the  report  on  each  important  account: 

Names  and  ages  of  individuals  or  partners 

Head  office  authorization  and  expiry  date  of  credit 

Total  fire  insurance  carried  both  on  liquid  and  fixed  as- 
sets, and  the  amount,  if  any,  assigned  to  the  bank 

Discussion  of  customers'  position  and  balance  sheet  giv- 
ing copy  of  the  latest  statement  of  affairs  and  notes  as  to 
the  changes  of  importance  therein,  indicating  progress  or 
the  reverse 

Remarks  regarding  customers'  wills  or  deeds  of  partner- 
ship, having  reference  to  the  way  in  which  the  bank  would 
be  affected  by  the  death  of  the  customer 

In  reporting  on  farmers'  and  other  casual  loans,  the 
original  date  of  the  transaction  must  be  given,  if  any  por- 
tion of  the  advance  has  been  running  for  more  than  twelve 
months.  The  object  of  the  loan,  time  of  repayment  and 
source  from  which  the  money  is  to  come,  should  also  be 
stated 

The  purpose  for  which  a  loan  has  been  granted  and  the 
source  of  repayment  should  be  stated — also  the  probable 
course  of  the  advance,  unless  payment  is  assured  at  ma- 
turity. 

In  connection  with  all  important  accounts  the  fol- 
lowing points  should  be  fully  discussed  with  the  man- 
ager by  the  inspector,  and  the  significant  features 
made  the  subject  of  correspondence: 

Personal : 

Moral  character,  habits,  and  business  ability 

Past  record 

State  of  health 

Life  insurance  carried 


INTERNAL  INSPECTION  313 

General : 

Is  financial  progress  satisfactory? 

Fluctuations  in  liability  and  reason  for  any  substantial 
increase — highest  and  lowest  points  of  advance  monthly  for 
past  year 

Promptness  in  meeting  obligations 

Obligations  in  connection  with  interests  outside  the  busi- 
ness, if  any 

Titles  to,  and  liens  or  mortgages  on  property,  informa- 
tion, researches,  etc. 

Value  of  collateral  held 

Value  of  the  account  or  the  connection 

Any  special  features  or  influences  which  are  likely  to  bene- 
fit or  be  detrimental  to  the  customer  or  the  business. 

If  a  wholesale  house: 

Distribution  and  classification  of  risks  in  credits  to  custo- 
mers, also  any  recent  or  anticipated  losses 
Financial  responsibility  of  largest  customers 
Percentage  of  bills  returned  unaccepted  or  unpaid. 

Having  fully  discussed  all  the  outstanding  features 
in  the  different  accounts  with  the  manager,  the  in- 
spector is  in  a  position  to  offer  a  reasonably  close  valu- 
ation of  all  the  accounts,  which  he  does  according  to 
the  following  ratings : 

First-class  business 

Accounts  regarded  as  desirable,  but  which  do  not  liqui- 
date satisfactorily 

Business  desirable  because  of  the  connection  or  local  con- 
ditions, but  not  on  its  merits  otherwise 

Undesirable  but  probably  collectible 

Locked  up  but  eventually  collectible 

Marginal  loss  probable 

Bad 


314  BANKING  PRACTICE 

A.  Secured  by  mortgage,  etc. 

B.  Interest  being  set  aside  as  a  contingent  fund 

C.  Not  producing  interest. 

On  his  return  to  the  head  office,  the  inspector  takes 
up  with  the  branch  and  records  by  correspondence 
any  objectionable  features  in  the  accounts,  which  he 
thinks  require  adjustment  or  comment. 

REVIEW 

Of  what  does  a  bank  inspection  consist? 
How  are  the  securities  and  cash  checked  ?     The  ledgers  ? 
According  to  what  ratings  does  the  inspector  value  all  the  ac- 
counts ? 


CHAPTER  X 

BANK  COST  ACCOUNTING 

1.  Need  of  a  cost  system. — Practically  every  bank 
of  any  importance  in  the  United  States  has  installed  a 
system  of  cost  accounting  and  made  a  careful  study  of 
the  principles  involved.  In  Canada,  however,  very 
little  attention  has  been  given  the  subject  by  the 
banks,  altho  in  almost  every  other  line  of  commercial 
industry  cost  accounting  is  accorded  thoro  consider- 
ation, and  in  fact  has  become  an  absolute  necessity 
under  modern  business  conditions. 

The  necessity  of  a  cost  system  to  a  bank  is  really 
greater  than  in  any  other  business,  owing  to  the  nar- 
row margin  of  profits  on  the  gross  amount  handled 
in  banking,  and  the  number  and  variety  of  services 
rendered  by  the  banks  to  their  customers  and  the 
public  without  remuneration. 

In  the  stress  of  competition  most  banks  overlook 
the  fact  that  eveiy  transaction  made  for  a  customer, 
no  matter  how  simple,  bears  a  basic  cost  to  the  bank. 
They  have  allowed  the  public  to  encroach  gi-adually 
on  their  legitimate  exchange  and  other  profits. 
Banks  are  not  only  rendering  a  great  many  services 
for  nothing,  but  frequently  at  a  loss  to  themselves. 
The  public  has  been  quick  to  grasp  this  weakness  of 

315 


316  BANKING  PRACTICE 

the  banks,  and  has  naturally  pressed  its  advantage  to 
the  utmost. 

Until  the  beginning  of  the  present  century  the 
profits  obtained  from  the  banking  business  were  large 
enough  so  that  the  loss  from  a  few  unprofitable  ac- 
counts had  no  appreciable  effect  on  a  bank's  net  earn- 
ings. Competition,  however,  has  brought  conditions 
to  a  state  such  as  has  existed  for  some  time  in  other 
lines  of  business,  so  that  it  has  become  more  and  more 
necessary  that  all  the  business  handled  by  a  bank 
should  show  a  certain  amount  of  profit  or,  at  all 
events,  not  be  transacted  at  a  loss. 

The  development  of  a  new  class  of  business — that 
of  small  and  miremunerative  checking  accounts — the 
vast  increase  in  the  volume  of  checks,  the  tendency  to 
carry  active  checking  accounts  in  the  savings  bank 
department  and  the  constantly  increasing  cost  of 
operating,  have  made  the  analysis  of  the  profit  or  loss 
on  individual  accounts  an  absolute  necessity.  The 
only  remedy  for  excessive  or  unintelligent  competi- 
tion among  Canadian  banks  lies  in  an  accurate 
knowledge  of  costs.  No  ordinary  argument  will 
appeal  to  a  branch  manager  sufficiently  to  restrain 
him  from  offering  extra  inducements  to  customers,  as 
long  as  he  honestly  believes  that  he  is  securing  such 
business  at  a  profit.  But  few  managers  would  per- 
sist in  offering  the  goods  or  the  services  of  the  bank 
for  less  than  cost  if  they  knew  the  actual  facts. 

With  expenses  constantly  on  the  increase,  and  with 


BANK  COST  ACCOUNTING  317 

returns  for  banking  services  steadily  diminishing,  the 
banks  have  been  forced  to  study  seriously  the  reduc- 
tion of  expenses,  both  by  the  introduction  of  improved 
labor-saving  methods  in  the  work,  and  by  systematic 
study  of  costs,  with  a  view  to  adjustment  or  elimina- 
tion of  any  accounts  or  transactions  which  have 
hitherto  been  handled  at  a  loss. 

2.  Principles  of  cost  accounting. — There  are  a 
great  many  factors  entering  into  what  constitutes  a 
profitable  account  to  a  bank.  The  amount  of  credit 
balance  maintained  is  not  the  principal  factor  to  be 
considered,  but  the  per  item  cost  of  the  entries.  In 
other  words,  an  account  with  a  balance  of  only  $200, 
with  a  few  entries,  can  easily  be  more  profitable  to  a 
bank  than  one  with  a  balance  of  $1,000  or  more,  but 
with  a  large  number  of  checks,  deposits  and  outstand- 
ing items. 

In  analyzing  accounts  the  following  questions 
should  be  considered: 

(a)  Is  the  account  producing  a  profit? 

(b)  Is  the  account  handled  at  a  loss? 

(c)  If  the  latter,  exactly  what  increase  of  balance  or 
other  change  of  conditions  governing  the  account  will  change 
the  loss  to  a  profit?  Tho  an  account  may  be  operated  at 
an  apparent  loss  it  frequently  happens  that  there  are  col- 
lateral advantages  which  warrant  a  continuation  of  the 
arrangement. 

(d)  If  the  account  is  profitable,  is  the  bank  justly  entitled 
to  a  larger  profit  than  now  obtained? 

(e)  Is  the  depositor  entitled  to  any  additional  conces- 
sions ? 


318  BANKING  PRACTICE 

In  considering  these  points  the  following  are  axio- 
matic : 

(a)  In  order  for  a  deposit  account  to  be  profitable 
the  balance  must  be  a  credit  balance. 

(b)  Any  account  is  profitable  if  the  income  from 
it  exceeds  the  expense  of  keeping  it. 

(c)  In  determining  whether  or  not  an  account  is 
profitable  the  amount  of  credit  balance  maintained  is 
not  necessarily  the  principal  factor  to  be  considered. 
In  the  valuation  of  an  account  the  amount  of  the  bal- 
ance is  of  secondary,  consideration  as  compared  with 
the  per  item  cost. 

( d )  In  reviewing  an  accoimt,  the  minimum  weekly 
credit  balance  is  the  one  that  determines  the  loaning 
value  of  the  balance.  Care  should  be  taken  to  dis- 
criminate between  the  value  of  an  average  balance 
and  a  steady  balance ;  the  former,  if  a  violently  fluctu- 
ating account,  is  valueless. 

(e)  Discount  on  loans  and  trade  bills,  as  well  as 
interest  on  debit  balances,  should  not  be  taken  into 
consideration  in  this  connection.  The  net  discount 
or  interest  earned  is  regarded  as  a  part  of  the  profit 
accruing  from  the  general  loanable  fimds  of  the  bank 
and  therefore  cannot  be  regarded  as  a  benefit  derived 
from  an  individual  account,  which  receives  due  credit 
for  the  amount  of  balance  maintained  on  deposit. 

( f )  In  considering  unprofitable  accounts,  one  point 
should  always  be  looked  into,  especially  in  the  case  of 
accounts  in  newly  established  branches.  This  con- 
sideration is  whether  or  not  the  actual  loss  to  the  bank 


BANK  COST  ACCOUNTING  319 

in  caiTying  the  account  is  less  than  the  amount  of  fixed 
charges  which  such  an  account  is  carrying. 

(g)  General  conditions  of  pohcy  must  govern  a 
bank  in  the  consideration  of  cost  figures,  and  the  in- 
troduction of  a  cost  system  does  not  imply  the  elimi- 
nation of  this  element.  It  does  mean,  however,  that 
in  deciding  upon  a  concession  in  any  individual  case, 
the  bank  will  have  an  exact  knowledge  of  the 
costs  and  earnings  of  the  account  and  will  know 
exactly  what  it  is  granting  and  the  actual  cost 
thereof. 

(h)  It  is  important  to  bear  in  mind  that  an  appa- 
rently large  balance  is  not  necessarily  remunerative. 
It  may  be  partly,  wholly,  or  more  than  offset  by 
items  in  transit  or  process  of  clearing,  so  that  without 
an  accurate  analysis,  a  customer's  balance  as  it  ap- 
pears on  the  ledger  may  be  a  very  deceptive  measure 
of  the  value  of  the  account. 

3.  Small  checking  accounts. — The  steady  increase 
in  the  number  of  small  current  accounts  is  becoming 
a  serious  problem  in  banking,  owing  to  the  difficulty 
and  expense  of  operating  them.  There  are  several 
classes  of  small  accounts,  some  of  them  desirable, 
others  neutral,  and  many  undesirable.  A  considera- 
tion of  the  origin  and  intention  of  these  small  accounts 
is  of  interest.  Roughly  speaking,  they  may  be  di- 
vided into  eight  classes:  the  last  class.  No.  8,  however, 
is  the  one  to  which  particular  reference  is  made,  owftig 
to  the  per  item  cost  with  no  compensating  balance  to 
support  fixed  charges. 


320  BANKING  PRACTICE 

1.  A  balance  created  by  the  payment  of  notes  or  other 
items  collected  by  the  bank  for  a  customer.  These  accounts 
are  generally  closed  by  one  withdrawal. 

2.  Proceeds  of  discounts  credited.  These  accounts  are 
generally  inactive  and  the  balance  left  comparatively  small, 
a  few  dollars  as  a  rule. 

3.  Money  left  for  safe-keeping  and  generally  withdrawn 
in  one  amount. 

4.  Funds  deposited  from  time  to  time  to  meet  certain  pay- 
ments ;  inactive  and  generally  withdrawn  in  one  amount. 

5.  Balances  of  subsidiary  business  accounts  of  large  cus- 
tomers, such  as  coupon  and  dividend  accounts,  pay  check 
accounts,  etc.,  the  checks  for  which  would  otherwise  go  thru 
the  general  account ;  therefore  a  matter  of  bookkeeping  con- 
venience to  the  customer,  and  as  a  rule  a  convenience  to  the 
bank.     Include  in  analysis  of  general  account. 

6.  Private  checking  accounts  of  partners,  managers  and 
other  officers  of  a  company,  and  occasionally  their  wives. 
These  accounts  are  generally  carried  willingly  by  the  banks 
as  a  matter  of  courtesy.  Such  accounts  frequently  have 
good  balances  in  the  savings  department. 

7.  Seasonal  accounts.  The  balances  of  these  accounts 
during  the  greater  part  of  the  year  are  generally  small,  with 
practically  no  entries,  and  represent  the  balance  left  over 
after  a  season's  operation  in  a  certain  class  of  business, 
such  as  agriculture  or  lumbering.  These  classes  of  busi- 
ness as  a  rule  maintain  satisfactory  balances  during  the 
height  of  their  activity  and  are  carried  as  a  courtesy  during 
their  period  of  comparative  inaction. 

8.  Small  checking  accounts  with  a  maximum  of  entries 
and  minimum  of  balance. 

The  bank,  for  this  last  class  of  accounts,  practically 
acts  as  bookkeeper  and  saves  the  depositor  in  some 
instances  $5  or  more  per  month  in  that  connection. 
Experience  has  shown  that  these  accounts  are  more 
fruitful  of  trouble  and  risk  to  the  bank  than  any  other 


BANK  COST  ACCOUNTING  321 

accounts,  and  once  a  mistake  is  made  the  loss  is  seldom 
recovered.  Forgeries,  raised  checks,  and  other  forms 
of  criminal  financing  are  frequent.  "Eternal  vigi- 
lance is  the  price  of  safety."  Beyond  the  personal 
equation  of  the  customer  and  his  good  opinion,  what- 
ever that  is  worth,  there  is  little  or  no  value  in  these 
accounts.  The  balances  are  small  and  of  such  a  fluc- 
tuating nature  that  practically  100  per  cent  cash  re- 
serve has  to  be  carried  to  meet  their  requirements. 
Furthermore,  as  the  deposits  would  probably  show 
that  about  90  per  cent  of  the  amounts  consist  of  checks 
and  bills  redeemable  at  other  banks  in  the  city,  there 
is  in  many  cases  a  real  overdraft  in  the  account,  pend- 
ing the  clearing  of  these  items. 

The  entries  on  these  accounts,  credit  and  debit,  cost 
at  least  three  cents  each.  Accounts  of  this  character 
take  up  a  great  deal  more  of  the  time  of  the  manager 
and  staff  than  practically  anj'^  of  the  desirable  ac- 
counts. As  a  rule  checks  are  issued  before  the 
deposit  is  brought  in,  and  frequently  it  is  necessary 
to  call  up  the  customer  by  telephone  in  order  to  pro- 
tect his  checks  from  protest. 

It  must  be  remembered,  however,  that  in  many 
small  branches  a  number  of  these  unprofitable  ac- 
counts can  be  carried  under  certain  conditions  w^ith- 
out  any  actual  money  loss  to  a  bank.  The  reason 
for  this  is  obvious.  A  small  branch,  especially  if 
newly  established,  has  certain  fixed  charges  to  maintain 
irrespective  of  the  business  done.  For  several  years 
after  opening,  it  has  men  and  machinery  to  spare 

XVI— 22 


322  BANKING  PRACTICE 

to  handle  this  class  of  account  without  any  additional 
expense.  It  is  only  when  the  business  has  increased 
and  more  men  and  office  accommodations  are  required 
that  these  accounts  become  burdensome.  This  ex- 
plains why  some  banks  advertise  for  and  encourage 
small  accounts.  They  enable  the  manager  to  become 
acquainted  with  his  neighbors,  and  frequently  a  small 
account  may  later  turn  out  desirable  or  bring  desir- 
able connections. 

Tlie  same  arguments  do  not,  however,  apply  to  a 
small  savings  bank  account.  Such  an  account  is  not 
intended  to  be  checked  against.  It  should  have  prac- 
tically no  expense  except  the  cost  of  opening,  calcu- 
lating the  interest  and  holding  the  resei'\x. 

The  tendency  to  check  against  savings  bank  ac- 
counts is  to  be  deplored  for  many  reasons.  The  banks 
have  no  machineiy  for  handling  these  checks.  The 
cost  amounts  to  about  six  cents  per  entry,  as  practi- 
cally every  signature  has  to  be  looked  up  with  each 
presentation,  the  pass-book  called  for,  etc.  More- 
over, this  abuse  of  the  savings  bank  account  is  an  open 
door  for  forgeries  and  other  frauds. 

The  increasing  activity  in  the  savings  bank  business 
is  constantly  adding  to  the  expenses  of  that  depart- 
ment, owing  to  the  number  of  checks  that  are  now 
being  issued  on  the  various  accounts  and  the  practical 
elimination  of  any  notice,  or  deduction  of  interest  in 
lieu  thereof.  No  bank  can  afford  to  pay  a  higher  rate 
than  three  per  cent  under  present  conditions.  In 
fact,  a  study  of  the  statements  of  the  various  banks 


BANK  COST  ACCOUNTING  323 

in  Canada  graphically  demonstrates  this  fact.     See 
Section  21,  page  114. 

4.  Branch  expenses. — A  service  which  the  Cana- 
dian banks  render  the  country,  and  which  is  usually 
but  poorly  appreciated,  is  the  branch  service.  It 
speaks  well  for  their  progressiveness  in  this  connec- 
tion when  the  number  of  branches  is  compared  with 
those  of  Great  Britain  or  elsewhere.  According  to 
the  Bankers'  Magazine,  during  a  recent  five-year 
period,  Canadian  branches  were  increased  fifty  per 
cent  while  in  Great  Britain  the  increase  was  only 
fifteen  per  cent.  Furthermore,  these  statistics  show 
that  Great  Britain  has  one  bank  for  every  5,116  in- 
habitants, while  Canada  has  one  for  every  2,847  peo- 
ple. Thus,  according  to  population,  the  bank  offices 
in  Canada  are  nearly  double  those  of  Great  Britain. 
It  must  be  remembered  that  the  Canadian  banks  open 
branches  under  a  great  deal  heavier  expense  and  more 
inconvenience  than  their  English  confreres,  and  a 
branch  is  more  likely  to  remain  an  expensive  burden 
in  Canada  for  a  longer  period  than  a  similar  branch 
in  the  old  country.  There  are  few  villages  in  Eng- 
land which  cannot  show  a  fair  proportion  of  affluent 
residents  either  living  in  the  village  or  occupying  the 
neighboring  country  houses,  whereas  in  Canada  a  new 
branch  generally  means  more  loans  than  deposits  with 
which  to  start.  Were  it  not  for  the  circulation  privi- 
leges the  expense  would  be  a  serious  deterrent  to  the 
practice  of  opening  up  branches,  especially  in  newly 
settled  localities. 


SU  BANKING  PRACTICE 

It  has  been  argued  that  there  is  a  great  economy 
in  the  branch  system  thru  the  fact  that  there  is  only  one 
executive  for  a  large  number  of  branches  as  compared 
with  the  individual  executives  required  for  the  Ameri- 
can national  banks.  This  economy,  great  tho  it  is, 
is  partly  offset  by  the  increased  cost  of  operating 
branches,  owing  more  particularly  to  the  non-concen- 
tration of  the  clerical  work.  In  other  words,  a  teller 
or  ledger-keeper,  for  instance,  in  a  big  office  can  easily 
put  thru  four  or  five  times  more  work  than  he  would 
be  called  upon  to  do  in  a  smaller  office.  This  state- 
ment is  substantiated  by  figures  the  writer  obtained 
from  one  of  the  leading  American  banks  where  for 
the  past  ten  years  the  average  number  of  men  per 
million  dollars  deposited  has  held  steadily  at  about 
four  and  six-tenths,  whereas  Canadian  banks  average 
twelve  or  thirteen  men  per  million  dollars  of  deposit. 

Very  interesting  statistics  concerning  the  business 
of  a  branch  can  be  derived  from  the  books.  A  pro- 
gressive record  of  all  useful  data  should  be  made  and 
compared  either  annually  or  semi-annually,  such  as 
total  turnover,  number  of  items  passing  thru  the  dif- 
ferent departments,  number  and  aggregate  salary  of 
men  employed,  amount  of  stationery  used,  average 
amount  of  deposits,  loans  for  the  year  and  other  in- 
formation of  similar  nature.  These  figures  are  gen- 
erally called  for  by  the  head  office,  but  in  any  case 
their  comparison  with  previous  years  is  invaluable  to 
a  branch  manager  who  aims  to  keep  expenses  within 
a  proper  ratio  to  the  business  transacted. 


BANK  COST  ACCOUNTING  325 

As  the  main  work  in  an  office  consists  in  handling 
the  loans  and  deposits,  a  simple  but  valuable  test  of 
this  ratio  is  to  find  the  percentages  which  salaries  and 
expenses  bear  to  the  combined  total  of  the  average 
loans  and  deposits.  It  is  interesting  to  note  how 
sensitive  these  percentages  are.  It  is  possible  to  ac- 
count for  any  change  over  the  previous  year  or  half- 
3'^ear.  An  increase,  for  instance,  in  the  expense  per- 
centage over  the  previous  year  would  probably  be  due 
to  some  extraordinary  expenses  for  repairs  or  the 
like.  An  increase  in  the  salary  percentage  might 
show  that  the  staff  employed  was  getting  more  ex- 
pensive than  the  business  warranted,  and  steps  should 
be  taken  to  exchange  for  lower  salaried  men  where 
possible. 

The  normal  tendency  of  both  percentages  is  con- 
stantly downward.  Every  upward  movement  should 
be  inquired  into  closely. 

5.  Inland  eoocliange. — The  transfer  of  funds  be- 
tween banks,  or  from  one  branch  to  another,  is  a  seri- 
ous source  of  expense,  a  fact  which  is  frequently  over- 
looked by  the  banks  in  attempting  to  meet  competition 
and  the  demand  of  the  public  for  "par  facilities." 

Generally  speaking,  out  of  every  $100  deposited, 
over  $90  consists  of  checks;  the  balance  consists  of 
bank  bills  and  legal  tenders,  the  species  is  neghgible, 
except  in  special  cases.  All  the  cost  of  the  special 
machinery  required  for  the  handling  of  this  vast  vol- 
ume of  checks  and  drafts,  for  their  transfer  from 
bank  to  bank  in  the  same  city  or  in  outside  cities,  is 


326  BANKING  PRACTICE 

borne  by  the  banks.  Local  transfers  are  handled 
without  any  remuneration  and,  in  the  case  of  outside 
transactions,  at  a  charge  frequently  insufficient  to 
cover  the  actual  expense  involved.  True,  this  one 
feature  may  be  considered  but  a  small  part  of  a  bank's 
business.  It  is  usually  looked  upon  as  one  not  worth 
considering.  Yet,  in  acting  as  a  clearing  house  in 
this  connection,  the  banks  of  Canada  render  an  inesti- 
mable sei-vice  to  the  country,  at  a  cost  of  millions  of 
dollars  annually. 

The  average  amount  of  outstanding  items  held  over 
night  for  the  daily  local  clearings  of  the  Canadian 
banks  is  over  $70,000,000.  This  offsets  nearly  three- 
fourths  of  the  average  circulation  of  the  banks.  At 
six  per  cent  interest  it  represents  over  $4,000,000  an- 
nually. In  addition  to  local  clearings  there  is  a  much 
larger  number  of  items  in  transit  between  branches 
and  correspondents,  some  of  which  business  is  trans- 
acted at  a  loss. 

A  customer  of  a  Toronto  bank,  for  instance,  meets 
a  note  by  depositing  a  check  on  another  bank  in  Tor- 
onto; interest  stops  when  the  note  is  charged  up  to 
his  account.  But  his  bank  does  not  receive  returns 
for  the  check  thru  the  clearing  until  the  following  day, 
a  loss  of  one  day's  interest.  If  the  check  had  been 
drawn  on  a  bank  in  Montreal  it  would  be  two,  or  in 
some  cases  three  days  (where  Sunday  intervenes) 
before  the  branch  at  Montreal  would  receive  clearing 
returns  for  the  item.  Even  if  the  check  were  only 
for  $100  the  loss  at  six  per  cent  would  amount  to 


BANK  COST  ACCOUNTING  327 

over  3/4  cents.  Broadly  speaking,  a  day's  interest  at 
six  per  cent  is  equivalent  to  a  little  over  one  sixty- 
fourth  of  one  per  cent.  It  is  important  to  bear  in 
mind  that  a  check  or  sight  draft  outstanding  seven 
days  has  exhausted  the  equivalent  of  one-eighth  of 
one  per  cent  in  interest  alone. 

In  making  an  exchange  charge  to  a  customer  there 
are  three  elements  of  expense  to  be  considered  and  ad- 
justed to  meet  the  special  conditions  of  the  customer's 
business,  namely: 

1.  Postage  and  the  actual  cost  of  stationery,  clerical 
work  and  the  like 

2.  Interest  for  the  time  outstanding  ^ 

3.  (a)    If  a  branch:  the  cost  of  the  ultimate  transfer 
of  funds  between  branches 

(b)   If  a  correspondent:   the  actual  commission 
charge 

4.  Profit  to  bank. 

The  first  three  clauses — expenses — are  incurred  in 
connection  with  every  transaction,  whether  with  a 
branch  or  coiTCspondent  or  whether  put  thru  at  par 
or  not.  It  is  advisable  for  every  branch  to  test  out 
its  exchange  charges  on  the  above  basis  and  see  if  the 
bank  is  being  fully  remunerated  for  its  services.  As 
an  example,  we  shall  work  out  the  details  of  handling 
a  check  between  two  such  important  centers  as  Mont- 
real and  Toronto. 

1  The   time   element   in   clause   2   is    frequently   overlooked,   with   the 
consequent   absorption   of  the   profit   into   expense. 


328  BANKING  PRACTICE 

Take  a  check      .  $100  cashed  in  Toronto: 

Office  and  postage  charges 2         cents 

Interest  for  time  outstanding  (2  days)  at 

6% 3.288  cents 

Total   cost 5.288  cents 

In  other  words,  a  check  for  $100  between  the  two 
branches  costs  approximately  5^  cents. 

It  may,  of  course,  be  advanced  that  a  bank  is  not 
out  any  interest  when  the  check  is  between  two  cus- 
tomers of  the  bank  at  different  branches.  This  is 
true  when  the  account  of  the  di'awer  is  in  funds  at 
the  time  the  check  is  cashed.  But,  theoretically,  the 
transaction  must  be  dealt  with  as  it  concerns  each 
customer  and  each  branch. 

Xo  merchant  would  sell  an  article  at  a  loss  to  one 
customer  simply  because  he  expected  to  make  a  sale  to 
another  customer  at  a  profit. 

There  is  a  tendency  on  the  part  of  some  customers 
to  expect,  almost  as  a  right,  all  sorts  of  par  privileges 
and  concessions  from  their  banks,  presuming  on  the 
fact  that  the  bank  would  be  sorry  to  lose  a  good  ac- 
count. This  is  a  peculiar  trait  in  men  who  are  other- 
wise honorable  and  free  from  petty  motives.  If  a  bank 
manager,  in  buying  goods  from  one  of  these  same 
customers,  tried  regularly  to  beat  down  the  price  or 
expected  to  get  all  small  wares  for  nothing  because 
they  did  not  cost  much,  what  would  the  merchant  say? 

With  the  change  in  the  time  only,  the  foregoing 
figures  would  apply  to  a  check  remitted  thru  any  other 
branch.     Should  the  item  be  sight  instead  of  a  check 


BANK  COST  ACCOUNT^^^G  329 

the  interest  period  would  be  increased  \^  seven  daj'^s, 
or  /U4  per  cent;  approximately  11  cents. 

A  collection  sent  to  a  correspondent,  however,  has 
to  stand  a  double  charge  in  the  interest.  Take  a 
check  for,  say,  $100  sent  from  Toronto  to  Carleton 
Place,  the  cost  would  be  as  follows: 

Office  charges   and  postage 2  cents 

Interest    for    time    outstanding,    Carletoni 

Place  and  return,  2  days  at  6% >  6.575  cents 

Remittance  sent  to  Montreal,  2  days J 

Exchange  charged  on  check  by  correspond- 
ent at  Carleton  Place 10  cents 

Total  cost 18.575  cents 

If  25  cents  was  collected  on  this  item,  the  bank 
would  have  earned  a  profit  of  six  cents;  which  is 
little  enough.  Had  this  been  a  sight  item,  the  bank 
would  have  lost  three  cents  or  more.  Of  course, 
amounts  below  the  hundred  on  which  a  minimum  is 
charged  help  to  improve  the  average  profit. 

A  small  table  (Figure  57)  showing  the  approxi- 
mate time  and  interest  cost  to  various  parts  of  the 
country,  to  and  from  a  branch,  will  greatly  assist  in 
these  calculations.  The  figures  above  are  based  on 
the  supposition  that  only  the  larger  items  received  in 
the  morning  mail  are  cleared  the  same  day ;  the  smaller 
ones  being  cleared  the  following  day.  It  is,  therefore, 
very  important  for  branches  to  remember  the  neces- 
sity of  using  the  mail  services  intelligently  with  a 
view  to  saving  interest;  in  other  words,  if  a  large 
item  is  cashed  during  the  day,  to  see  that  it  gets  out 


AVERAGE  TIME  OCCUPIED  IN  CLEARING  BETWEEN 
BRANCHES 


H 
P^ 

2J 

O 

03 

2 
2 
2 
3 
3 
5 
6 
6 
7 

3 

1 

3 
3 
6 

7 
7 

7 

2 
2 

1 

2 

3 
5 
6 
6 

7 

3 
3 
3 
2 
2 
4 
6 
5 
7 

4 
4 
3 
2 
2 
4 
5 
5 
6 

6 

6 
6 
5 
4 
2 
3 
3 
5 

6 
6 
6 
6 
5 
3 
3 
3 
5 

6 
6 
6 
6 
5 
3 
4 
2 

4 

7 

7 
7 
7 
6 
5 
5 
3 
3 

2 

Prince   Edw.    Isl 

New  Brunswick    

2 
2 

3 

6 

6 

Alberta 

6 

1  day's  interest  at  6%  ^  l/S-t,  approximately. 

Therefore,  the  cost  of  interest  (say)  between  points  in  Ontario  and 
Manitoba  is  4/64  =  1/16,  if  sent  to  a  correspondent  the  item  would  be 
8  days  outstanding,  or  8/64  =  %  of  1%  for  interest,  as  it  would  take  the 
same  time  to  clear  the  return  remittance. 


INTEREST  ON 

$1,000 

Days 

2% 

*V2% 

6% 

Decimal 
Values  of 

64ths 

l/32nds 

1 

.0548 

.1233 

.1644 

.15625 

1 

2 

.1096 

.2466 

.3288 

.3125 

2 

1/32 

3 

.1644 

.3699 

.4932 

.46875 

3 

4 

.2192 

.4932 

.6575 

.625 

4 

1/16 

5 

.2740 

.6164 

.8219 

.78125 

5 

6 

.3288 

.7397 

.9863 

.93750 

6 

3/32 

7 

.3836 

.8630 

1.1507 

1.09375 

7 

1/10 

8 

.4384 

.9863 

1.3151 

1.250 

8 

1/8 

9 

.4932 

1.1086 

1.4795 

1.40625 

9 

10 

.5479 

1.2329 

1.6438 

1.5625 

10 

5/32 

11 

.6027 

1.3562 

1.8082 

1.71875 

11 

12 

.6575 

1.4795 

1.9726 

1.87500 

12 

3/16 

13 

.7123 

1.6027 

2.1370 

2.03125 

13 

14 

.7671 

1.7260 

2.3014 

2.18750 

14 

.... 

15 

.8219 

1.8493 

2.4658 

2.34375 

15 

1/4 

Figure  57 
330 


BANK  COST  ACCOUNTING  331 

by  the  first  mail  even  if  a  special  letter  is  necessary. 

Tho  in  the  above  examples  we  have  not  included 
any  chai-ge  for  the  transmission  of  funds  on  the  indi- 
vidual item,  this  expense  must  eventually  be  met  in 
some  form  or  other  in  the  adjustment  of  balances 
between  branches,  either  by  remittance  of  legal  tender 
or  bank  notes,  etc.  Express  charges  run  from  30 
cents  to  three  or  four  dollars  per  one  thousand  dollars. 

The  above  facts  establish  conclusively  that  the  cash- 
ing of  checks  at  par  at  the  branches  is  a  constant 
source  of  loss  to  a  bank  and  that  outstanding  items  in 
the  course  of  collection  or  in  transit  from  a  more  seri- 
ous and  unavoidable  expense  for  which  a  bank  should 
be  compensated. 

6.  Cost  data. — The  loanable  value  of  the  balance 
maintained  must  be  determined  by  each  individual 
bank  for  itself  according  to  its  net  earnings.  It  can 
be  arrived  at  in  various  ways  but,  generally  speaking, 
it  averages  between  four  and  four  and  a  half  per 
cent. 

Two  cents  per  check  is  considered  a  low  cost  per 
item.  Mr.  F.  W.  Thomas  of  Toledo,  an  expert  in 
banking  cost  accounting,  places  the  cost  of  an  ordinary 
check  at  two  and  a  half  cents  while  he  computes  a 
savings  bank  check  at  six  and  a  half  cents.  jNIr. 
Bordwell  of  San  Francisco,  figures  that  a  clearing 
house  check  costs  1.22  cents  and  an  out  of  town  item 
2.7  cents  for  bookkeeping  only.  A  customer's  check 
costs  3.13  cents,  or  2.87  cents  if  the  customer  supplies 
his  own  check  form.     A  Chicago  bank  makes  its  cal- 


332  BANKING  PRACTICE 

dilations  at  1.516  cents  per  check,  but  this  figure  does 
not  include  anything  for  overhead  charges,  for  man- 
agement, check  blanks  and  other  incidental  expenses. 
It  is  simply  for  clerical  work,  rent,  light  and  heat. 
The  other  figures  are  over  all. 

The  English  banks  not  only  charge  the  customer 
for  postage,  check  books  and  the  hke,  but  expect  a 
reasonable  balance  to  be  maintained;  generally  a  min- 
imum of  about  £100  in  the  city  or  £50  in  a  country 
branch. 

In  arriving  at  the  actual  cost  per  item,  it  is  neces- 
sary to  include,  in  addition  to  the  cost  of  clerical  work, 
the  cost  of  the  supei'vision  of  the  manager  and  ac- 
countant, the  apportionment  of  the  rent,  stationery, 
light,  heat,  and  vault  and  safe  accommodation;  also 
an  apportionment  of  head  office  expenses.  This  in- 
volves extra  work,  but  once  a  basis  for  per  item  cost 
is  established  in  an  office,  it  will  serve  for  the  con- 
sideration of  all  accounts  for  the  year.  Even  if  the 
bank  considers  only  the  salaries  of  the  men  actually 
engaged  in  handling  checks  and  deposits — namely  the 
teller  and  ledger-keeper — the  cost  per  check  just 
under  this  one  expense,  will  be  found  surprising. 

It  is  seldom  realized  by  a  customer,  or  even  by 
the  manager  himself,  that  a  check  form  on  safety 
paper  costs  $2.50  per  thousand  or  one-fourth  cent  each. 

For  the  average  branch  in  Eastern  Canada  a  per 
item  cost  of  2  cents  per  check  is  accurate  enough 
for  general  purposes,  or  to  put  it  another  way,  a 
steadj^  average  balance  of  between  50  and  60  cents 


BANK  COST  ACCOUNTING  333 

per  check  issued  should  be  maintained.  An  ac- 
count, for  instance,  which  issues  one  thousand  checks 
per  annum  should  maintain  a  balance  thruout  the  j'ear 
of  between  $500  and  $600  to  cover  the  out-of-pocket 
expenses  of  the  bank  in  operating  the  account. 

7.  An  account  analyzed. — In  order  to  illustrate 
some  of  the  more  elementary  features  of  cost  account- 
ing, the  following  brief  analysis  will  be  useful.  The 
account  shows  an  average  weekly  credit  balance  of 
$7,000  for  the  year,  average  amount  of  items  in  transit 
$5,300,  average  amount  of  checks  cashed  at  par  at 
other  branches  $600,  number  of  checks  issued  seven 
thousand. 

GROSS  EARNINGS 

Interest   on   the  average  balance  at   4V2%» 

$7,000 .".  .  .    $315 

Exchange  received  on  items  deposited  or  col- 
lected        325 

$640     $640 

LESS  VALUE  OF  WORK  DONE 

Interest  value   of   items   in    transit    average 

$5,300  at  5% $265 

Interest  on  checks  crossed  at  par  and  paid  by 
branches,  average  outstanding,  $600  at 
5%     30 

Collection  charged  paid  to  other  banks 78 

Office  charges  on  7,000  debits  to  the  account 

at  2  cents  each 140 

Total   cost $513     $513 

This  leaves  a  net  profit  to  the  bank  of  $127. 


334  BANKING  PRACTICE 

Even  with  the  large  balance  of  $7,000  it  will  be 
noticed  that  there  is  constantly  outstanding  $5,900, 
consisting  of  $5,300  of  items  in  transit,  and  $600  of 
checks  paid  at  par  by  other  branches.  This  leaves  the 
real  balance  practically  $1,100  instead  of  $7,000.  It 
is  well  to  remember  that  the  bank  must  base  its  hold- 
ings of  cash  reserves  on  the  larger  or  book  balance, 
which  will  reduce  still  more  the  net  balance  of  $1,100. 

The  rate  of  interest,  four  and  a  half  per  cent,  is 
based  on  a  net  earning  power  of  five  per  cent  less  ten 
per  cent  for  cash  reserve. 

The  "exchange  received"  is  self-explanatory,  but 
attention  is  drawn  to  the  fact  that  the  schedule  of 
exchange  charges  is  evidently  insufficient.  In  mak- 
ing the  rate,  full  allowance  was  not  made  for  the 
length  of  time  the  items  would  be  outstanding.  The 
total  cost  for  collection,  interest  and  commissions  was 
$343,  or  $18  more  than  the  exchange  collected,  and 
were  it  not  for  the  free  balance  of  $7,000  the  account 
would  be  operated  at  a  serious  loss. 

The  most  satisfactory  way  of  obtaining  the  average 
amount  of  items  in  transit  is  to  multiply  each  item  by 
the  number  of  days  it  was  outstanding,  and  divide  the 
total  amount  by  the  number  of  days  under  considera- 
tion. This  will  give  the  average  daily  amount  out- 
standing. 

In  the  accounts  of  customers  who  have  the  privilege 
of  crossing  checks  payable  at  par  at  another  branch, 
particular  attention  should  be  paid  to  the  date  such 
checks  are  cashed  at  the  other  branch,  and  the  mterest 


BANK  COST  ACCOUNTING  335 

during  the  time  taken  in  transit,  made  an  expense 
against  the  account.  The  correct  treatment  is  shown 
in  the  above  statement.  This  is  necessary  because 
the  amount  of  such  checks  in  transit  not  only  affects 
the  amount  of  the  credit  balance  but,  in  addition, 
some  customers  do  not  arrange  to  provide  funds  for 
theii"  checks  until  they  are  about  due  at  the  bank.  In 
many  cases  they  do  not  even  provide  the  funds  then, 
until  their  attention  is  called  to  the  matter.  Par 
privileges  should  not  be  accorded  to  accounts  of  this 
nature.  They  should  be  granted  only  to  accounts 
which  keep  a  credit  balance  commensurate  with  the 
work  done,  in  addition  to  having  ample  funds  to 
cover  outstanding  checks. 

Altho  the  account  shows  a  profit,  it  is  not  a  normal 
one,  as  there  is  a  serious  weakness  shown  in  the  rates 
of  exchange  charged.  A  slight  drop  in  the  deposit 
balance  would  turn  the  profit  into  a  loss.  An  ex- 
amination of  the  cash  items  deposited  will  show  on 
what  points  the  rate  of  exchange  is  inadequate,  and 
an  adjustment  should  be  made  accordingly.  Condi- 
tions in  a  customer's  business  are  constantly  chang- 
ing. The  nature  of  the  items  deposited  varies 
accordingly.  An  exchange  rate  that  is  satisfactory 
one  year  might  not  be  so  the  next. 

8.  Method  of  analysis. — The  work  of  analyzing  an 
ordinary  account  is  not  very  onerous,  especially  if 
systematically  followed  out.  The  course  of  the  de- 
posit balances  is  the  main  information  required. 
Wholesale  and  other  accounts  depositing  a  large  num- 


336  BANKING  PRACTICE 

ber  of  cash  items  involve  more  work,  especially  if 
the  data  for  the  whole  year  is  required.  Usually, 
however,  the  transactions  for  a  month  are  sufficient 
for  all  general  purposes. 

The  amount  earned  on  an  account  depends  princi- 
pally on  the  value  of  the  credit  balances  maintained. 
For  purposes  of  analysis  the  minimum  weekly  credit 
balance  is  the  one  which  should  be  considered.  Any 
money  on  deposit  less  than  a  week  has  no  loanable 
value  to  a  bank  so  far  as  an  individual  account  is  con- 
cerned. It  may  be  contended  that  under  the  law  of 
averages,  and  considering  the  accounts  as  a  whole, 
the  average  weekly  or  even  daily  balance  is  of  value, 
but  in  an  analysis  no  account  should  depend  for 
strength  in  any  particular  on  another  account.  For 
purposes  of  comparison,  however,  the  average  monthly 
balance  should  be  considered  in  the  general  sizing  up 
of  the  account. 

If  the  account  shows  debit  balances  during  the 
period,  the  exact  number  of  days  overdi*awn  and  the 
amount  at  credit  should  be  shown. 

Debit  balances  do  not  enter  into  the  value  of  a 
deposit  account.  The  net  discount  or  interest  earned 
thereon  is  considered  as  part  of  the  profits  accruing 
from  the  general  loanable  funds  of  the  bank,  and 
cannot,  therefore,  be  regarded  as  a  benefit  derived 
from  any  individual  account.  Furthermore,  in  the 
analysis,  credit  is  accorded  the  account  for  any  loan- 
able funds  supplied. 

The  average  debit  balance,  however,  is  of  value  for 


BANK  COST  ACCOUNTING  337 

purposes  of  comparison,  and  can  be  easily  ascertained 
on  the  basis  of  the  interest  debited  to  the  account  dur- 
ing the  period. 

If  interest  is  allowed  on  the  credit  balance  or  any 
part  of  it  the  amount  of  interest  credited  should  be 
taken  into  account  as  part  of  the  expenses.  Care 
should  be  taken  to  see  that  the  interest  credited  covers 
the  whole  period  under  analysis. 

9.  Eocchange  received  on  items  deposited  and  col- 
lected.— Gross  earnings  are  derived  from  the  value 
of  the  credit  balance  and  from  the  exchange  received 
on  items  deposited  and  collected.  Profits  on  special 
transactions,  such  as  letters  of  credit,  foreign  ex- 
change, circulation  and  the  like  should  be  shown 
separately. 

In  an  ordinary  deposit  account  there  are  compara- 
tively few  items  deposited  drawn  on  out-of-town 
points,  and  the  rates  received  for  these  are  generally 
remunerative.  However,  in  the  case  of  wholesale 
merchants  and  other  distributors  who  deposit  a  large 
number  of  cash  items,  the  rate  of  exchange  charged  is 
generally  low  and  frequently  unremunerative,  unless 
the  destination  and  interest  cost  of  the  items  has  been 
taken  into  consideration  in  making  the  rate. 

Therefore  the  first  data  to  examine  in  this  connec- 
tion is  the  schedule  of  rates  under  which  the  account 
is  operated.  To  the  practised  eye  the  weak  points 
in  the  arrangement,  if  any,  will  at  once  become  appa- 
rent. 

It  would,  of  course,  be  impossible  to  consider  each 

XVI— 23 


338  BANKING  PRACTICE 

item  iiidividiially.  The  best  method  is  to  divide  Can- 
ada into  provinces  or  sections.  The  figures  given 
for  each  province,  etc.,  should  be  multiphed  by  the 
average  number  of  days  which  items  remitted  to  each 
section  are  outstanding.  The  result  will  represent  the 
amount  of  items  in  transit  outstanding  on  the  basis 
of  one  day,  and  when  divided  by  the  number  of  days 
in  the  period  will  give  the  average  amount  outstand- 
ing. It  is  a  simple  matter  for  any  branch  to  make  a 
schedule  showing  the  average  time  between  the  de- 
posit of  an  item  and  the  receipt  of  the  relative  clear- 
ing returns  from  various  points  in  the  country. 

A  statement  should  be  made  of  checks  drawn  on 
banks  in  the  same  city,  the  returns  for  which  are  not 
received  until  after  clearing  the  following  day.  An 
account  could  easily  deposit  $50,000  of  local  checks 
and  have  only  $5,000  to  $10,000  balance  at  the  end 
of  the  day.  In  other  words,  the  bank  would  be  lend- 
ing $45,000  overnight  without  interest.  If  this  occurs 
daily,  as  it  does  to  a  great  extent,  it  is  a  serious  burden 
on  the  bank. 

In  allowing  for  the  time  an  item  is  outstanding,  it 
must  be  borne  in  mind  that  the  loss  of  interest  does 
not  cease  until  the  actual  clearing  returns  are  in  the 
hands  of  the  bank.  Items  sent  to  correspondents, 
therefore,  are  not  finally  disposed  of  until  the  relative 
settlement  checks  have  been  actually  cleared  at  Mont- 
real or  Toronto,  or  on  whatever  central  point  the 
draft  is  drawn. 

The  gi'oss  amount  of  exchange  received,  less  the 


BANK  COST  ACCOUNTING  339 

correspondent's  commission  and  interest  value  of  the 
time  in  transit,  will  show  the  net  profit  or  loss  on 
exchange.  An  account  should  also  receive  credit  for 
the  net  exchange  received  from  collections  and  dis- 
counts. Interest  is  not  an  expense  in  comiection  with 
exchange  on  collections,  but  in  arriving  at  the  net 
exchange  on  discounts  the  time  occupied  in  remitting 
or  returning  the  items  should  be  taken  into  account. 
The  basis  of  rebate,  if  any,  in  connection  wqth  cash 
items  or  discounts  should  be  looked  into  carefully,  as 
this  is  a  fruitful  source  of  loss. 

10.  Checks  paid  at  par  at  other  branches. — Refer- 
ence has  already  been  made  to  the  loss  sometimes  en- 
tailed in  granting  this  j^rivilege.  In  the  case  of 
checks  cashed  at  par  by  another  branch,  the  ledger- 
keeper  should  make,  in  the  ledger  account  opposite  the 
entry  of  the  check,  a  memorandum  showing  the  date 
of  encashment.  The  check  becomes  a  charge  against 
the  account  as  soon  as  it  is  paid  by  the  other  branch. 
The  analysis  of  some  accounts  in  regard  to  items  in 
transit  and  checks  paid  at  par  will  frequently  afford 
surprising  results  in  the  dissolving  of  apparently  sub- 
stantial balances. 

11.  General  remarks. — The  question  of  cost  ac- 
counting for  banks  offers  a  large  field  for  study  and 
investigation,  and  it  is  impossible  in  a  volume  of  this 
nature  to  deal  exhaustively  with  the  subject.  How- 
ever, the  broad  fundamentals  have  been  touched  upon 
in  the  hope  that  the  information  and  suggestions  given 
will  be  sufficient  to  arouse  the  interest  of  the  reader 


340  BANKING  PRACTICE 

and  induce  him  to  make  a  further  study  of  what  is 
an  intensely  interesting  subject.  Every  manager 
should  make  himself  thoroly  acquainted  with  the  costs 
and  expenses  at  his  own  branch  and  with  the  opera- 
tion of  everj^  account,  in  order  that  he  may  find  out 
whether  the  time  spent  by  himself  and  the  staff  in 
operating  each  account  is  compensated  for  by  the 
balance  at  credit,  or  other  collateral  advantages. 

The  analysis  itself  is  purely  mechanical.  The  real 
test  is  to  decide  whether  an  adjustment  of  the  rates 
should  be  discussed  with  the  customer,  or  whether  the 
collateral  advantages  of  the  account  outweigh  any 
unsatisfactory  feature  disclosed  by  the  analysis. 
Business  men  as  a  rule  are  not  unreasonable  when  an 
issue  is  put  squarely  before  them.  Few  would  refuse 
to  make  some  adjustment  of  an  account  if  they  were 
shown  that  it  was  working  a  palpable  injustice  to 
the  bank.  The  tactful  manager  could  take  advantage 
of  a  favorable  opportunity  to  suggest  to  a  customer 
slight  changes  which  would  place  the  account  on  a 
more  satisfactory  basis.  Various  methods  are  avail- 
able; the  balance  might  be  increased,  the  exchange 
rate  adjusted  or,  in  the  case  of  a  small  checking 
account,  a  flat  rate  of  fifty  cents  or  one  dollar  per 
month  could  be  made. 

It  is  preferable  to  submit  the  account  to  a  rigid 
analysis  and  thus  allow  leeway  for  the  consideration 
of  collateral  benefits,  rather  than  to  make  a  less  ex- 
haustive analysis  and  run  the  risk  of  overlooking  some 
imfavorable  feature.     After  an  analysis  is  completed. 


BANK  COST  ACCOUNTING  341 

consider  carefully  all  the  advantages  of  the  connec- 
tion. The  customer's  side  of  the  question  should  also 
be  impartially  considered ;  he  may  have  cause  for  com- 
plaint, and  analysis  is  invaluable  in  either  case. 
When  the  results  of  an  investigation  indicate  unsatis- 
factory conditions  it  is  generally  advisable,  unless  the 
unfavorable  feature  is  very  outstanding,  to  defer  any 
action  until  the  fact  has  been  confirmed  by  a  subse- 
quent analysis. 

REVIEW 

If  you  were  determining  whether  or  not  an  account  Avas  profit- 
able to  a  bank  what  factors  would  you  consider? 

Of  the  eight  classes  of  accounts  enumerated  which  are  desirable, 
which  are  neutral  and  which  are  undesirable  ? 

Why  is  it  a  bad  plan  to  check  against  saving  accounts  ? 

What  elements  of  expense  are  incurred  in  making  an  exchange 
charge  to  a  customer  ?     Give  an  illustration. 

Analyze  an  account  so  as  to  show  gi'oss  earnings  and  the  ex- 
pense of  keeping  the  account. 

What  changes  would  j'ou  suggest  if  an  account  had  proved 
unprofitable .'' 


INDEX 


Accommodation  Paper, 

Objections  to,  112;  Disguising.  272; 
Kinds,    272-73;    Forgery,    273 

Account,  Analysis  of  a  Bank, 

Illustration,  333-35;  Exchange 
charges,  334;  Crossing  checks, 
334;  Profit,  335;  Method,  335- 
36;  Credit  and  debit  balances, 
336-37;  Exchange  received,  337 
Gross  earnings,  337;  Rate  sched 
ules,  337;  Checks  in  same  city 
338;  Branches,  339;  Net  "ex 
change  and  interest,  339;  Obtain 
ing  a  more  satisfactory  basis 
340;  Rate  adjustments,  340;  Ad 
vantages    considered,     341 

Accountant  of  Branches,  149-50 

Accounting,   Bank, 

Books,  155  et  seq.;  Loose-leaf,  159- 

60 
See  Banks,  Head  Office 

Accounts,   Bank, 

Small,  94;  Opening,  198;  Signa- 
tures, 199;  Pass  book,  199,  207- 
9;  Ledger,  199-200,  205;  Part- 
nership, 200-1 ;  Joint  stock  com- 
panies, 201;  Joint,  200;  Married 
women,  201;  Quebec,  201-3; 
Charging  back,  203-5 ;  Indexing, 
205;  Loose-leaf,  205;  Deposit 
slip,  206-7;  Money  received 
after  hours,  207;  Fraud,  209- 
10;  Certification,  210-11  ;Checks, 
210;  "Kiting,"  210;  Overdrafts, 
211;  Savings  bank  ledger,  213- 
14;  Machine  statements,  214-15; 
Envelope  system,  215;  Inspec- 
tion, 312;  Analyzing,  317-19; 
Profits,  317;  Unprofitable,  318; 
Small  checking,  319-21;  Saving 
bank,    322 

Army  BiU  Act,  6-7 

Assets,   Bank, 

Quick,  109;  Current  loans,  111  et 
seq.;    Call   loans,    254 

Assignment, 

Form,  282;  Advances  on,  283;  De- 
scription  of  goods,    283-84 

Assignments,    Advances    on. 

To  whom  made,  276-78;  Bank  Act, 
277;   Forms,   279;   Written  prom 


343 


Assignments — continued 

ise,  279-80,  285;  Security,  280; 
Legal  assignments,  281-86;  Dec- 
laration, 286-89;  Use  of  money 
obtained,  288;  Note,  the,  289- 
92;  Questions,  292-93;  Examina- 
tion of  property,  293;  Margin, 
294;  "Current  season,"  301-2; 
Default,  302-3 
See  Warehouse  Receipts,  Advances 
on. 

Attorney,  Power  of, 

How  issued,  249;  in  Quebec,  249; 
Overdrafts,  249-50;  Typical, 
250-51;  Termination.  252;  Mu- 
nicipal   authorities,    253 

Audit,   The, 

Officer,  307;  Use,  307;  Cash  and 
securities,  308-9;  Ledgers,  308; 
Statements,  310;  Sundries,  310- 
11 

Auditors,   Bank, 

Appointment,     28;     Duties.     28-29; 

Reports,    28-29 
See    Shareholders'    Audit 


Bank,  A, 

Definition,   12 ;   White,  Horace.   12 

Bank  Accounts,    See   Accounts,    Bank 

Bank  Act   of   1913, 

Copies,  17;  Leading  features,  17; 
Changes,  18;  .Shareholders'  au- 
dit, 18-19,  28-29;  Reserves,  gold, 
18,  31-32;  Abstract.  20-21; 
Banks  under,  21;  Incorporation, 
22;  Organization.  22-23:  Cer- 
tificates, 23-24;  Treasury  Board, 
23,  34-35,  45;  Dividends,  30; 
Reserve,  cash,  30—31;  Note  is- 
.sues,  31;  Redemption  fund.  33; 
Suspension  of  payment,  33 ;  Wind- 
ing-up, 34;  Powers  of  a  bank. 
36-37;  Loans,  37-39;  Interest 
and  exchanges,  39;  Amalgama- 
tion, 40-41;  Statements,  41  et 
seq:  Dissolution,  44;  Suspen- 
sion, 44—45;  Canadian  Bankers' 
Association,  45;  Penalties,  45— 
46;  Amendment,  46-47;  War, 
European,    46-47;    Regulation    for 


344 


INDEX 


Bank  Act — continued 

note  issue,  53-54;  Emergency 
currency,  64;  Branches,  69;  Du- 
ties of  executives,  129  et  seq. ; 
Advances  on  assignments  and 
warehouse  receipts,  276-294;  De- 
f;iult.  302-3 
Sfe    Note    Issues 

Banking, 

David  Harum,  218;  Making  loans, 
218   et    seq. 

Bank    Cost   Accounting,    See    Cost  Ac- 
counting,   Bank 

Banking  System, 

History  of  Canadian  Evolution,  3 ; 
White,  Horace,  3;  Four  periods, 
4 ;  New  France,  4-5 ;  Britisli 
occupancy,  5—6;  Army  bill,  7; 
Provincial  banking,  6-7;  Bank  of 
Montreal,  7;  Independent  ven- 
tures, 7;  Regulation  by  Britain, 
7;  National  system,  8-9;  British 
North  America  Act,  8;  Dominion 
General  Bank  Act,  9;  Walker, 
Sir  Edmund,  10-11 

Bankers'   Magazine,   323 

Banks,    Canadian, 

Bank  Act,  12 ;  Functions,  12 ;  Com- 
mercial, 12—13;  Branches,  13; 
National  character,  13;  Savings, 
13—14;  Trust  and  loan  comi)a- 
nies,  14—16;  Supervision,  19— 
20;  Incorporation  and  organiza- 
tion, 22-23;  Capital  stock,  23, 
25-27;  Directors,  23-25;  Treas- 
ury Board,  23;  By-laws,  24;  Cer- 
tificates, 24;  Subscriptions  to 
stock,  26;  Transfer,  26-27;  An- 
nual statements,  27-28,  41-42; 
Collateral,  37;  Holdings,  37; 
Loans,  37;  Machine  receipts,  37- 
38;  Interest  and  exchange,  39: 
Deposits,  40;  Amalgamation,  41; 
Dissolution,  44;  Suspension,  44— 
45;  European  war,  46—47;  Bills 
of  Exchange  Act,  47-48;  Gold 
holdings  in  1913,  51-52;  Out- 
standing circulation,  55;  Protec- 
tion of  noteholders,  55—56 ;  In 
panic,  78—81;  Competition,  80; 
Advantages,  Johnson,  Joseph 
French,  82-83;  European  war, 
83-88;  Profits,  94-96;  One  man, 
one  bank,  102;  Quick  assets, 
109;  Real  estate  and  premises, 
114,  121;  Liabilities,  123;  Di- 
rectors, 127;  Executives,  127: 
President,  127;  General  man- 
ager. 128-30;  Head  office,  129- 
30;  Branch  superintendents,  130— 
31;     Inspection,     132-33;     Secre- 


Banks,   Canadian — continued 

tary,  133;  Chief  accountant, 
134;  Records,  135  et  seq.;  Reli- 
ance on  branch  managers,  147- 
48;  Accounting,  155-56;  Safe- 
guarding loans  245  et  seq. 
See  European  War,  Statement,  An- 
alysis  of   Bank 

Bills     and     Accounts     Receivable,     in 
Borrowers'     statements,    236 

Bills  of  Exchange  Act,  47-49,  269 

"Blue  Books,"   192 

Bookkeeping        in        Branches,        See 
Branches,    Records    of 

Borrower,  the, 

Branch  system  and,  73;  Establish- 
ing credit,  75-78 ;  Facts  to  know 
about,  219  et  seq.;  Obtaining  net 
worth,  223 ;  Importance  of  state- 
ment, 226-29;  Credit  standing, 
et    seq. 

Bradstreet's   Journal,    221-23 

Branch   Banking,    Economic   Value,    13 

Branch  Managers, 

Reliance  on,  147;  Duties  and  re- 
sponsibilities, 147-48 ;  Daily 
work,    147-48 

Branch  System,  the, 

Utility,  66;  Bank  Act,  69;  Illus- 
tration, 69-70;  Circulation,  70— 
72;  Interdependence,  70;  Open- 
ing new,  70—71 ;  Number,  71 ; 
Scotland  and  England,  71 ;  Bor- 
rowers, 72  et  seq.;  Distribution 
loanable  funds,  72;  Line  of 
credit,  75-76;  Customers,  76; 
Panics,  78-81;  Depositors,  79- 
80;  Competition,  80;  Unison, 
80-81;  Personnel,  81;  European 
war,  83-88;  Inspection,  306-7; 
Expenses  and  economies,  323—25; 
Exchange   costs,    325-33 

Branches,  Records  of. 

Clearing  statements,  137—38,  141, 
177-79;  Returns  to  head  office, 
141;  Financial  statements,  141- 
42;  C^sh  book,  155-56,  160-65; 
Books,  156-59;  Loose-leaf,  159- 
60,  163;  Discount  register,  164: 
Blotter,  166;  Loans,  164;  Trade 
bills  diary,  169;  Draft  register, 
170-71;  Check  lists.  171-73; 
Cash  items,  173-75;  Remittance 
books,  175-77;  Head  office,  181- 
83;  Teller's  records,  183-84 
Ledgers,  184  et  seq.;  Deposits 
187;  Savings  banks,  189;  Liabil 
ity  ledgers,  190-92;  "Blue 
books,"  192;  Collection  register, 
192-94;  Collateral,  194;  State 
ment     to      government,      194-95 


INDEX 


US 


Branches — continued 

Balance  book,  196;  Discrepancies, 
196:    Overdrafts,    196 

Branches,  Staff  of, 

Superintendent,  130;  Inspector, 
131-33;  Managers,  147-49;  At- 
tracting deposits,  148;  Account- 
ant, 149-50;  Teller,  150-51; 
Ledger-keeper,  151-52;  Collection 
clerk,  152;  Discount  clerk,  153; 
Junior,    153-54 

British  Colonies,  Note  Issue  in,   32 

British  North  America  Act,  8 

British  Begulation  of  Canadian  Bank- 
ing,  6-8 

Business    Conditions,    Monthly    Report 
on,    143-45 

Business  Failures, 

Reasons,  221-22;  Lack  of  capital, 
222;    Incompetence,    223 


Call  Loans, 

In  Bank  statement,  101-08;  Defini- 
tion, 101-02;  Interest,  102;  Se 
curity,  102,  255;  In  New  York 
and  London,  103-04;  Walker,  Sir 
Edmund,  106-08;  Bank  asset, 
254;  Margin,  254;  Form,  255; 
Records,    256 

Canadian    Bankers'     Association,     20, 
44-45 

Cannon,  James  G.,  224,  225-28 

Capital,  Lack  of  business,  222 

Capital  Stock, 

Organization,  22-23;  Increase  or 
decrease,  25-26;  Treasury  Board, 
25;  Calls,  26;  Personal  property, 
26;  Subscriptions,  26;  Transfer, 
26-27;    Trusts,   27 

Cash  Book, 

Principal  record,  155;  Contents, 
160-61;  Debit  and  credit  entries, 
161-62;  Writing-up,  162;  Sup- 
plementary,   163 

Certification   of   Checks,   210-11 

Certification     of     Customers'     Books, 
208-09 

Checks, 

Of  other  banks,  100;  Bank  state- 
ment, 101;  Accommodation,  210; 
Certification,  210-11;  "Kiting," 
210;  Cashing,  211;  Overdrafts, 
211;  Forged  or  raised,  211;  Iden- 
tification, 211;  Customer  unable 
to  write,  213;  Cost,  330-31; 
Crossing,   334 

Circulation,    Records,    139-40 
See  Note  Issues 

Circulation  Redemption  Funds,  33,  55 

Clearing   Statement,    177-83 


Collateral,   Register,    194 
See    Security 

Collections, 

Clerk,   152-53;   Register,   192-94 

Commercial  Banks,  12-13 

Competition,    Excessive,    316 

Corporations,    256-59 

Cost  Accounting,  Bank, 

Necessity  for,  315;  In  United 
States,  315;  Excessive  competi- 
tion, 316;  New  class  of  business, 
316;  Principles,  317;  Profits, 
317;  Analyzing  accounts,  318  et 
seq.;  Unprofitable,  318-22;  Sav- 
ings bank,  322;  Branches  ex- 
penses and  economies,  323-24; 
Elementary  features,  333;  Analy- 
sis of  an  account,  334  et  seq.;  In- 
land exchange,  325—31;  Cashing 
checks,    330-33;    Costs,    331-33 

Credit, 

Principles,  15;  Trust  and  loan  com- 
panies, 15-16;  Establishing,  75- 
78;  War,  87-88;  Definition,  219; 
Facts  to  know  about  borrower, 
219  et  seq.;  Business  failures, 
221—23;  Borrowers'  statement. 
225-27;  Cannon,  James  G.,  227- 
28;  Rules,  227-28;  Professional 
men,  262;  Farmers,  264;  Retail 
merchants,  265-66 ;  Wholesalers 
and  manufacturers,  265;  Good  col- 
lateral, 269-71 ;  Accommodation 
paper,  273;  Renewal  notes,  273; 
Overdrafts,    274 

Credit  Men's  Association,  224 

Credit  Money, 

New  France,  5 ;  Hamilton,  Alexan- 
der,   5 

Crop  Movements,  Currency  for,  60 

Currency,    Emergency 

See    Emergency    Currency 

Current  Loans, 

Advances  to  customers,  111-12; 
Classes,  111;  Accommodation, 
112;    Leroy-Beaulieu,    113 

"Current  Season"  Loans,  301  et  seq. 

Customers, 

Position  in  Canada  and  United 
States,  76-77;  Credit,  77-78; 
Advances  to,  111—12;  In  inspec- 
tion,   312-14 


Declaration,   the. 

Importance,  287;  Prior  rights,  287; 
Security,    287 
Demand    Deposits,    94-96 
Depositor, 

Security  of,  79;  Reserve  fund,  121- 
23 


346 


INDEX 


Deposits, 

Regulation,  39-40;  Bank  statement, 
92;  Time,  92;  Difficulties,  92-93; 
Interest  rate,  93,  118-19;  Saving 
banks,  93;  Demand,  94-96; 
Abuse  of  checking  privilege,  94 ; 
Small  accounts,  94;  Pownall,  G. 
H.,  95;  Outside  of  Canada,  96; 
With  foreign  banks,  101 ;  At- 
tracting, 147-48 ;  Supplementary 
cash  book,  162-63;  Ledger,  163, 
199-200;  Branches,  ledgers,  187- 
88;  Responsibility  for,  198;  Open- 
ing, 199;  Signatures,  199;  Slip, 
206-07 
See  Accounts,  Bank 

Directors, 

Appointment,  22;  Provisions  for, 
24;  General  powers,  25;  Annual 
statements,  27-28;  Supervision 
by,  127;  Qualifications,  128; 
Loans,    129 

Discount  Clerk,    153 

Dividends,  Method  of  payment,   30 

Dominion  Notes  Act,  50 

Dominion  Notes, 

"Legal  tender,"  50;  Act,  50-51; 
Amount,  51;  Gold  reserve,  51-52; 
Redemption,  51;  Bank  statement, 
99-100 

Dunbar,    "Economic    Essays,"    57 

Elasticity  of  the  Note  Issue, 

Value,  56-57;  Dunbar,  57;  Sea- 
sonal   fluctuations,    57 

Emergency  Currency, 

European  war,  46 ;  Crop  move- 
ments,  60,   64 

Errors  in  Bookkeeping,   196 

European  War, 

Canadian  banks  and,  46;  Elasticity 
of  issue,  83-88;  No  moratorium, 
84;  Preceding  year,  85;  Loans, 
85;  Trade  balance,  85-86;  White, 
Sir  Thomas,  85-86;  Banks  in 
1916,  86-87;  Increased  deposits, 
87;    Credit   to   Britain,    88 

Exchange,  Inland, 

Source  of  expense,  325;  Outstand- 
ing items,  326;  Between  branches, 
327  et  seq.;  Costs  and  profits, 
327;  Time  and  interest  cost, 
329-31;   Cost  data,   331-33 

Failures,    Business 

See   Business   Failures 
Farmers, 

Bank  loans,  74-75,  263 ;  Creation 
of  liquid  assets,  263;  Limit  on 
loans,   264;    Security,   265 


Financial  Times,  109 

France,   New, 

Period  of  banking,  4-5;  Settlement 
by,  4-5;  Credit  money,  5;  Ham- 
ilton, Alexander,   5 

Frauds,    Guarding   against,    209-10 

"Free  Banking  Act,"    7 


Gold, 

In  little  use,    50;   Amount   in  banks 
in    1913,    51 
Gold,  Reserves  of. 

Creation,    18;    Central.    31-32,    65- 
67,    109;   Trustees,   32;   Dominion 
notes,   51-52;  In  bank  statement, 
99-100 
Government,   the. 

Supervision,    19-20;    Funds,    96-98; 
Financial   statements   to,    194 
Guarantee  Bonds  as  Security,  246-47 


Hague,  George,  266-67 

Hamilton,  Alexander,  5 

Harum,  David,  218 

Head  Office,  the, 

Executives.  130  et  seq.;  Bookkeep- 
ing, 135  et  seq.;  Ledgers,  135- 
37;  Statistical  books,  137;  Stock 
transfer  books,  137;  Branch  clear- 
ing statements,  137-38,  141; 
Shareholders'  ledger,  138;  Circu- 
lation, 139-40;  Dividends,  139; 
Unissued  notes.  139-40;  Returns 
by  branches,  141;  Financial  state- 
ments, 141-42;  Discounts,  142; 
Balance  sheet,  143 ;  Business  re- 
ports, 143-45;  Overdue  bids,  143; 
Routine,  145-46;  Branch  entries. 
181-83;  Loans  submitted  to,  242- 
46 

Hypothecation     of     Collateral     Notes, 
270-72 


Identification,  212-13 

Incorporation,  Joint  Stock  Companies, 
256-57 

Inland    Exchange,    See    Exchange,    In- 
land 

Inspection  of  Banks,  132-33 

Inspection,   Internal, 

Branches,  306-07;  Two  kinds,  306; 
Training  of  inspector,  307; 
Audit,  308-11;  Liability  return, 
311 

Inspector,  Chief,  132-33 

Insurance,     Necessity     for     Customer, 
235-36 


INDEX 


347 


Interest,   Rate   of, 

Time    deposit.    93;    Call    loans,    103, 
105;    On   deposits,    118-19 


"Kiting"   Checks,   210 


Johnson,  Joseph  French,  82-83 

Joint   Stock  Companies, 

Definition,  256;  Loans  to,  256  et 
seq.;  Incorporation,  257;  Open- 
ing account,  257;  Obtaining  in- 
formation concerning,  257;  Offi- 
cers, 257  ;  Guarantee  by  directors, 
259-60 


Ledger-Keeper,  151-52.  198,  210 

Ledgers,    Bank, 

Head  office.  135-36;  Branches,  155- 
56,  184-87;  Deposits,  163;  Sav- 
ings bank,  189,  213-14;  General 
liability,  190;  Entries,  199,  205; 
Audit,   309 

Leroy-Boileau,    113 

Liabilities,  Bank, 

In  statement,  98-99;  123:  Ledger, 
190-92;    Inspection,    311-12 

Loans,   Bank, 

Provisions  for,  37-39;  Security,  37- 
38,  246  et  seq.;  Warehouse  re- 
ceipts, 37-39;  Interest  rates,  39 
Branches,  72 ;  Fluctuation,  72 ;  In 
crease  in,  73 ;  Regular  customers 
73;  Foundation  for,  74;  Out 
break  of  European  war,  85;  Call 
101-08;  Current,  110-13;  Super 
vision  by  directors,  128—29 
Branch  managers  and,  131 
Classes  of,  164;  Reducing  loss 
218;  Poor  and  good,  219;  Qualifi 
cations  of  borrower,  219;  Rules 
220,  227-28;  Business  failures 
221-23;  Bradstreets,  222-23;  Net 
worth  of  borrower,  223—24;  Can- 
non, James  G.,  224n,  225-28; 
Canadian  Credit  Men's  Associa- 
tion, 224n;  Borrowers'  state- 
ments, 225-27;  Credit  standing 
of  borrower.  240—42 ;  Submission 
to  head  office,  242;  Guarantee 
bonds,  246;  Customers'  wills, 
247;  Safeguarding  bank,  247-48; 
Power  of  attorney,  249  et  seq.; 
Municipal  authorities,  252-53  ;  On 
assignments,  276  et  seq.;  On 
warehouse  receipts,  295  et  seq.; 
"Current  season,"  301 
f!ee  Assignments,  Warehouse  Re- 
ceipts,   etc. 


Loans,   Classification  of, 

Call  loans,  101-08,  254-56;  Joint 
stock  companies,  255—60;  Munici- 
palities, 260-62;  Professional 
men,  262;  Farmers,  263-65;  Re- 
tail merchants,  265;  Manufac- 
turers and  wholesalers,  266-68; 
Hague,  George,  266-68;  Notes  as 
collateral,  268-69;  Bills  of  Ex- 
change Act,  269;  Security,  269; 
Hypothecation  of  notes,  270 : 
Rules  for  accommodation  paper, 
272-73;  Renewed  paper,  273;  Ob- 
jections to  overdrafts,  274 

Loose-leaf    Accounting,     159-60,     163, 
187,    205 

Lumbering  Industry,  and  Note  Issues, 
63 


Machines,      Keeping     statements      by, 
214-15 

Managers, 

Must  study,  81;  Ability  in  making 
good  loans,  218-19;  Decision, 
242;  Application  for  loan.  243- 
45;  Audit,  310;  Must  know  costs, 
346 

Manufacturers  and  Wholesalers, 

Bulk  of  bank  loans  to,  266-68; 
Hague,   George,   266-67 

Married  Women, 

Bank  accounts  of,  201;  In  Quebec, 
201,  203;  Husband's  authoriza- 
tion, 202;   Indorsements,   203 

Merchandise, 

Security  for  loans,  74;  Analysis  of, 
234-36;    Insurance,    235 

Minister  of  Finance, 

Report  to,  29;  Emergency  circula- 
tion, 31-32;  Deposits  with,  32- 
33;  Suspension  of  payment,  33; 
Monthly  and  annual  statement  to, 
41—44;    Dissolution    of    banks,    44 

Monetary  System,  Canadian, 

Elements,  50;  Dominion  notes,  50- 
53 

Montreal,   Bank  of.   6 

Mortgages,     Liability     in     Borrowers' 
Statements,    239 

Municipalities,   Loans   to,   252,   260-62 


New  France,  See  France,   New 

New  York, 

Call  loans,  104;  Canadian  money  in, 
104-05 ;  International  money  mar- 
ket,   105 

Note,  the,  Required  for  advances,  289- 
92 

Noteholder,   Protection  of  the,   55-56 


348 


INDEX 


Note  Issues, 

Bank  Act,  30-31;  Crop  moving,  31, 
60;  Interest,  31;  Emergency,  31, 
64;  In  British  colonies,  32; 
Pledge  prohibited,  32;  Deposit 
with  Minister  of  Finance,  32-33 ; 
Redemption  fund,  33;  Suspension 
of  payment,  33-35;  Counterfeit, 
35;  Signing,  35;  Amount  in  circu- 
lation, 1913,  52;  Value,  52;  Daily 
redemption,  54,  56 ;  Circulation 
Redemption  Fund,  55;  Failed 
banks,  55;  Elasticity,  56  et  seq.; 
Dunbar,  57;  Changes  in  circula- 
tion, 58  et  seq. ;  Monthly  fluctua- 
tions, 59—60 ;  Lumber  industry, 
63;  Central  gold  reserve,  65-66; 
Advantages,  66;  Lost  or  de- 
stroyed, 67;  Branches,  68  et  seq.; 
Panics,  78—80;  Reciprocal  pay- 
ments, 82 ;  Johnson,  Joseph 
French,  82-83;  European  war, 
84;  Bank  statement,  98;  Carried 
in  tills,  139-40 
See  Branch   System 

Notes,   Dominion,   See  Dominion  Notes 

Overdraft, 

Register,  196;  Allowing,  211,  249; 
Objections,  274;  Savings  account, 
275 

Panics, 

Canadian  banks  in  time  of,  78-81; 
1907,  80,  106;  Walker,  Sir  Ed- 
mund,   106-08 

Partnership, 

Accounts,  200-01 ;  Non-trading, 
200;  Joint  stock  companies  and, 
201 

Pass  Book,  Customers', 

Provisions  for,  199 ;  Teller  does  not 
make  entries,  207;  Writing  up, 
207;  Customers'  certification, 
208-09;  Duplicate,  214;  Machine 
statements,    214—15 

"Percentage  Bank,"   120-21 

Postal  Savings  Bank,    13 

Pownall,    George,    H.,    95 

Professional  Men,    Loans    to,    262 

Profit  and  Loss  Statement,  114-15 

Profits,  Bank, 

Net,  116  et  seq.;  "Percentage 
bank,"  120-21;  Gross,  122; 
Earlier,   316;   Accounts,   317 

Provincial  Banking,  See  Banking,  His- 
tory  of  Canadian 

"Provincial  Note   Act,"    7 

Quebec,  Province  of, 

Married   women,    201-03 ;    Stuart   v. 


Quebec — continued 

Bank  of  Montreal,  20c 
attorney,    249 


Power  of 


Real  Estate  and  Fixtures, 

As  security,  74;  Holdings  by  banks, 
114;    Borrowers'    statement,    237- 
38 
Records,  Bank, 

Head   office,    135   et   seq.;    Branches, 
155   et   seq. 
Redemption  of  Notes, 

Circulation    Fund,    33 ;    At   par,    34 ; 
Dominion   notes    in   payment,    34— 
35;  Daily,   54,  56 
Reserves, 

Cash,   30;  Central  gold,  65-67,  109; 
Trustees,    66;    In    United    States 
and     Canada,     108;     Fund,     121- 
23 
See  Gold  Reserve 
Retail  Merchants,  Loans  to,  206 

Savings  Banks, 

Functions,  13;  Government  and.  13- 
14;  Postal,  13;  Interest  rates. 
14;  Deposits,  93;  Ledger,  189, 
213-14;  Duplicate  pass  books, 
214;  Small  accounts,  322;  Check- 
ing against,  322 
Seasonal  Fluctuations,  57-58 
Security,    for   Loans, 

Real  estate,  74;  in  Bank  statement, 
101;  Call  loans,  102,  254-56; 
Guarantee  bonds  dangerous,  246- 
47;  Customers*  wills,  247-48; 
Guarantee  by  corporation  direct- 
ors, 259-60;  Farmers'  loans,  265; 
Collateral  notes,  268—69;  Accom- 
modation paper,  272—73 

See      Assignments,      Advances      on, 
Warehouse  Receipts,  Advances  on 
Shareholders, 

Regulations     for,      25;      Vote,      25; 
Double  liability,   45 :    Supervision, 
4.5-46;    Ledgers,    138-39 
Shareholders'   Audit, 

New  features  of  Bank  Act,  18; 
Methods,  19;  Supervision  by  gov- 
ernment, 19—20;  Provisions  in 
Bank  Act,  28-29;  Duties  of  audit- 
ors, 29 ;  Reports  to  Minister  of 
Finance,  29 
Statement,   Analysis  of  a  Bank, 

Bank  Act,  89;  Typical,  90;  Under- 
standing, 91;  Assets  and  liabil 
ities,  91;  Intention,  91;  Impor 
tance,  92;  Time  deposits,  92-93 
Savings  banks.  93 ;  Demand  de 
posits,  94-96:  Pownall,  G.  H.,  95 
Due    to    banks,    96;     Government 


INDEX 


349 


statement,  Bank — continued 

funds,  96-98;  Circulation,  98; 
Capital  and  reserve,  99 ;  Specie 
and  Dominion  notes,  99—100; 
Notes  and  checks  of  other  banks, 
100—01;  Deposits  with  foreign 
banks,  101;  Securities,  101;  Call 
Loans,  102-08;  Reserves,  108-10; 
Quick  assets,  109;  Financial 
Times,  109-10;  Current  loans, 
110—13;  Advances  to  customers, 
111-12;  Overdue  debts,  li;fi-14; 
Real  estate,  114,  121;  Profit  and 
loss,  114—15;  Net  profits,  116- 
17;  Interest  on  deposits,  118-19; 
"Percentage  bank,"  120-21;  Re- 
serve Fund,  121—23;  Gross  profits, 
122;  Liabilities,  123 
Statements,  Borrowers' 

Importance,  225  et  seq.;  Form,  228- 
29;  Cash  on  hand,  229;  Typical, 
230-32;  Merchandise,  234-35; 
Raw  materials,  235;  Bills  and  ac- 
counts receivable,  236;  Real  es- 
tate, machinery,  and  fixtures,  236- 
38;  Current  liabilities,  238-39: 
Compared  with  books  of  bank, 
239;  Life  insurance,  etc.,  239: 
Mortgages,  239;  Sales  to  branch 
houses,  240;  Regular,  242 
Statements,  Financial,   to  government, 

194 
Stuart  V.  Bank  of  Montreal,  203 
Substitution    of    Goods    as    Security, 

297-300 
Suspension  of  Banks,  44-45 
Suspension  of  Payment  of  Notes, 
Interest,    33;    Redemption   Fund,    33 


Teller,  the, 

Duties  and  responsibilities,  150-51; 
Records,  183-84;  Customers'  pass 
books,  207-09;  Powers  of  ob- 
servation, 210;  Cashing  checks, 
211;    Overdrafts,    211 

Time   Deposits,    92-93 

Trade  Paper,   Discounting,   78 

Treasury  Board, 

Bank  Act  of  1913,  23;  Functions, 
23n;  Capital  Stock,  25;  Winding- 
up  a  bank,  34;  Note  payment,  35; 
Supervision,     45—46 

Trust  and  Loan  Companies, 

In  banking  field,  15;  Dangers  of, 
15;  Demand  deposits,  15-16; 
Credit  principles,    16 

United  States, 

Loans  in,  76-77;  Panic  of  1907,  80, 
106;  Legal  reserves,  108;  Cost 
accounting,    315 

Walker,    Sir  Edmund,    10-11,    106-03 

Warehouse  Receipts, 

Advances  on,  as  collateral,  87-39; 
Rules,  294;  To  whom  made,  295; 
Definition,  297;  Substitution,  297- 
300 

War  of  1812, 

Canadian  banking,  6;  Army  Bill 
Act,    6 

White,   Horace,    3,    12 

White,   Sir  Thomas,   85-86 

Wholesalers,    See    Manufacturers    and 
Wholesalers 

Wills,    Safeguarding  the   bank   in  cus- 
tomers',   247 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


Form  L9-32»j-8,'58(5876s4)444 


HG 

Patterson  - 

2702 
P27b 

Banking  princi- 
ples and  practice 

UCSOUTWFR'JRF'" 


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AA  000  552  645  4 


HG 

2702 

P27b 


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